THE  UNIVERSITY 
OF  CALIFORNIA 


Graduate  School  of 
Management  Library 


^t^ 
v 


The  Romance  and  Tragedy 
of  Banking 


Problems  and  Incidents  of  Governmental 
Supervision  of  National  Banks 


By 

THOMAS  P.  KANE 

Deputy  Comptroller  of  the  Currency 


NEW  YORK 
THE  BANKERS  PUBLISHING  CO. 

itti 


Copyright,  1922,  by 
The  Bankers  Publishing  Co. 


CAMBRIDGE.    MASS..   U.  *.   A 


GSMgmt, 
Library 


Q55-T 

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TO  MY  ASSOCIATES  AND  CO-WORKERS  IN  THE  OFFICE 

OF    THE    COMPTROLLER    OF    THE    CURRENCY, 

AND  IN  THE  FIELD  SERVICE,  THIS  BOOK 

IS    AFFECTIONATELY    DEDICATED 


1680352 


The  Romance  and  Tragedy 
of  Banking 


CONTENTS 


Pago 

INTRODUCTION  -         -  1 


CHAPTER  I.— THE   NATIONAL  BANK  ACT   AND   ITS 

ORIGIN  5 

Origin  and  passage  of  the  National  Bank  Act 

CHAPTER  II.— THE  CURRENCY  BUREAU  18 

Organization  of  the  National  Currency  Bureau — Tenure  of  office  of 
the  Comptroller  of  the  Currency — Composition  of  the  Currency 
Bureau — National  Bank  Circulation  first  printed  under  contract — 
Profit  to  Government  from  circulation  more  than  entire  cost  of 
bureau. 

CHAPTER    III.— HUGH    McCULLOCH  28 

Biography  of  Hugh  McCulloch,  the  first  Comptroller  of  the  Cur- 
rency— McCulloch's  annual  reports — McCulloch's  circular  letter  to 
the  banks — McCulloch's  appointment  as  Secretary  of  the  Treasury 
— Selection  of  McCulloch  to  organize  the  bureau — First  national 
bank  organized. 

CHAPTER  IV.— FREEMAN  CLARKE  86 

Biography  of  Freeman  Clarke — First  failure  of  a  national  bank — 
Clarke's  annual  report  to  Congress — Bank  failures  during  Clarke's 
administration — Failure  of  the  Venango  National  Bank  of  Frank- 
lin, Pennsylvania — Proposed  removal  of  the  bureau  to  New  York. 

CHAPTER  V.— HILAND   R.   HULBURD  47 

Biography  of  Hiland  R.  Hulburd — Payment  of  interest  on  bank 
balances — Operation  of  the  Reserve  laws — National  Bank  Circula- 
tion vs.  Government  Issues — Bank  note  redemption  agency — 

ix 


CONTENTS 

Page 

Instances  of  theft  in  connection  with  currency  shipments — Greut 
Chicago  fire  of  1871  and  its  effect  upon  the  banks — Bank  failures 
during  Hulburd's  administration — Amendments  to  the  laws 
enacted. 


CHAPTER  VI.— JOHN  J.  KNOX  71 

Biography  of  John  Jay  Knox — Knox's  annual  reports— Panic  of 
1873  and  its  causes — Resumption  of  specie  payments — The  Freed- 
mans  Savings  and  Trust  Company — Real  estate  loans  by  national 
banks — Interpretation  of  the  banking  laws — Banking  conducted 
on  widely  different  lines  than  formerly — Bank  failures  during 
Knox's  term — Failure  of  the  National  Bank  of  the  State  of 
Missouri — Charges  preferred  against  Knox  by  United  States 
Attorney — Knox's  reply  to  charges — Failure  of  the  First  National 
Bank  of  Washington,  D.  C.,  and  of  Jay  Cooke  &  Company — 
Inadequacies  of  the  law  and  recommendations  for  amendments 
— Amendments  to  the  law  enacted. 


CHAPTER  VII.— HENRY  W.  CANNON  115 

Biography  of  Henry  W.  Cannon — Panic  of  1884— Cause  of  the 
financial  troubles  of  1884 — Failure  of  the  Marine  National  Bank — 
Failure  of  the  brokerage  firm  of  Grant  &  Ward — Legislation 
recommended. 


CHAPTER  VIII.— WILLIAM  L.  TRENHOLM  131 

Biography  of  William  L.  Trenholm — Unprecedented  reduction  in 
circulation — Trenholm's  circular  letter  to  the  banks — Plan  for 
National  Currency  reform — Failure  of  the  Fidelity  National 
Bank — Peculiar  construction  of  the  law — Criticism  of  official 
supervision  of  the  banks — The  Chicago  wheat  deal — Suggested 
amendments  to  the  law — Heterogeneous  currency  system — 
Amendments  to  the  law. 


CHAPTER  IX.— EDWARD  S.  LACEY  151 

Biography  of  Edward  S.  Lacey — Monetary  stringency  of  1890 — 
Failures  during  Lacey's  administration — Failure  of  the  Keystone 


CONTENTS 

Page 

National  Bank — Failure  of  the  Spring  Garden  National  Bank — 
Failure  of  the  Maverick  National  Bank — Necessity  for  some  lim- 
itation on  the  discount  of  commercial  paper — Suggested  amend- 
ments to  the  law. 

CHAPTER  X.— A.  BARTON  HEPBURN  178 

Biography  of  A.  Barton  Hepburn — National  bank  failures  dur- 
ing Hepburn's  administration — Failure  of  the  National  Bank  of 
Guthrie,  Oklahoma — Annual  report  of  Hepburn — Amendments  to 
the  law  recommended. 

CHAPTER  XI.— JAMES  H.  ECKELS  -  187 

Biography  of  James  H.  Eckels — Panic  of  1893 — The  model 
receiver — Ex-convict  receiver  and  examiner — Suspensions  during 
the  panic  of  1893 — Shrinkage  in  assets  and  liabilities — Cause  of  the 
panic  of  1893 — Most  important  bank  failures  during  the  panic  of 
1893 — The  Zimri  Dwiggins  chain  of  banks— The  Chemical  National 
Bank  and  its  branch  in  the  Exposition  grounds  at  Chicago — The 
National  Bank  of  Kansas  City,  Missouri — Failure  of  the  National 
Bank  of  Illinois — Amendments  to  the  law  recommended. 

CHAPTER  XII.— CHARLES  G.  DAWES  215 

Biography  of  Charles  G.  Dawes — Liquidation  of  receiverships — 
Second  assessment  of  stockholders — National  bank  failures  during 
Mr.  Dawes'  administration — Failure  of  the  dlobe  National  Bank — 
Defalcation  in  the  First  National  Bank  of  New  York  City— The 
Currency  Laws — Preferment  of  stockholder  to  depositor — Cur- 
rency legislation  suggested — Amendments  to  the  laws  recom- 
mended by  Mr.  Dawes — Reserve  Cities  with  a  population  of 
25,000 — Amendment  to  the  banking  laws  enacted. 

CHAPTER  XIII.— WILLIAM   B.  RIDGELY  248 

Biography  of  William  B.  Ridgely — Extension  of  corporate  exist- 
ence of  national  banks — Robbery  of  the  Merchants  National  Bank 
of  Lowell,  Massachusetts — The  Baltimore  and  San  Francisco 
fires — Failure  of  the  Chicago  National  Bank — Legality  of  the 
action  of  the  Clearing  House  Banks — Indictment,  trial  and  con- 
viction of  John  R.  Walsh— The  Bigelow  defalcation — Culpability 

xi 


CONTENTS 

Pace 
of    the    bank    examiner — Bank    failures    during    Mr.     Ridgely's 

administration — The  failure  of  the  Citizens  National  Bank  of 
Oberlin,  Ohio— The  celebrated  Cassie  A.  Chadwick— The  Andrew 
Carnegie  notes — Obligations  of  Directors — Failure  of  the  National 
Bank  of  North  America  and  the  Amsterdam  National  Bank  of 
New  York  City — Indictment,  trial  and  conviction  of  Charles  W. 
Morse — Trial  and  acquittal  of  F.  Augustus  Heinze,  indicted  on  the 
same  charges — Failure  of  the  Farmers  and  Drovers  National  Bank 
of  Waynesburg,  Pennsylvania — Ridgely's  policies  of  administration 
— The  crisis  of  1907 — Failure  of  the  Aetna  Banking  and  Trust 
Company  of  Butte,  Montana,  and  branch  at  Washington,  D.  C. — 
Secretary  Shaw's  ruling  in  regard  to  reserve  requirements — Brief 
panic  in  Wall  Street — Life  of  receiverships — Ridgely's  annual 
reports — Amendments  to  the  banking  laws. 

CHAPTER  XIV.— LAWRENCE  O.  MURRAY  801 

Biography  of  Lawrence  O.  Murray — Murray's  first  official  act — 
Bank  examiners  and  bank  examinations — Difference  between  an 
examination  and  an  audit — Failure  of  the  National  City  Bank  of 
Cambridge,  Massachusetts — Rotation  of  examiners — Bonding  of 
examiners — Instances  of  dishonesty  on  the  part  of  examiners — 
National  Monetary  Commission  and  Mr.  Murray's  peculiar  attitude 
ibefore  the  Commission — Fee  system  of  compensation — Instances 
of  excessive  and  undue  concentration  of  loans  made  by  banks — 
Faultiness  of  Mr.  Murray's  knowledge  of  banking  laws — Murray's 
famous  twenty-nine  questions — The  poetical  critic — Murray's 
mismanagement — President  Taft  on  so-called  reforms — Examiners' 
fees — Characteristics  of  Murray's  administration — Failures  during 
Murray's  term — Change  of  location  of  small  suburban  bank — A 
chicken  bank. 


CHAPTER  XV.— INTERIM  407 

Interim  between  expiration  of  Murray's  term  and  appointment  of 
John  Skelton  Williams — Failure  of  the  First-Second  National 
Bank  of  Pittsburgh — Failure  of  United  States  Trust  Company  of 
Washington,  D.  C. — Deposit  of  U.  S.  Treasury  funds  in  Munsey 
Trust  Company  by  Mr.  Williams — The  Miss  Lottie  M.  Taylor 
incident — The  Federal  Reserve  Act  and  date  of  passage  in  House 
and  Senate. 


CONTENTS 

Page 

CHAPTER  XVI.— JOHN  SKELTON  WILLIAMS  443 

Biography  of  John  Skelton  Williams — Aldrich-Vreeland  Emer- 
gency law — The  Riggs  National  Bank  controversy — Bill  of  com- 
plaint filed  by  Riggs  National  Bank — Court's  ruling  on  powers  of 
Comptroller — Extension  of  charter  of  Riggs  National  Bank — 
Indictment  of  officers  of  Riggs  National  Bank  for  perjury — Trial 
of  case — Origin  of  Riggs  National  Bank — General  activities  of 
Comptroller  Williams — Mr.  Williams'  anti-usury  campaign — Theft 
of  postage  and  currency — McFadden's  suit  to  enjoin  the  Comp- 
troller— Last  official  act  of  Comptroller  Williams. 


CHAPTER  XVIL— DANIEL  RICHARD  CRISSINGER  491 

Biography  of  Daniel  Richard  Crissinger — Malcontents — Commer- 
cial value  of  title  "First  National" — Theodore  Roosevelt's 
methods — First  official  act  of  Comptroller  Crissinger — Modification 
of  form  for  reports  of  condition — Suit  to  forfeit  the  charter  of  the 
First  National  Bank  of  Hagerstown,  Maryland — Stock  dividends 
— Enforced  liquidation  of  Fort  Dearborn  National  Bank  of 
Chicago,  Illinois — Extension  of  charters — Branch  banks  or 
branch  offices — Proposed  abolition  of  office  of  Comptroller  of 
the  Currency  and  consolidation  of  Bureau  with  Federal  Reserve 
Board — Status  of  Federal  Reserve  Board. 


ILLUSTRATIONS 


Page 

THOMAS  P.  KANE    -  1 

HUGH  McCuLLocH  -  23 

FREEMAN  CLARKE    -  85 

HlLAND    R.    HULBURD  47 

JOHN  JAY  KNOX     -  71 

HENRY  W.  CANNON  115 

WILLIAM  L.  TRENHOLM  -  131 

EDWARD  S.  LACEY  -  151 

A.  BARTON  HEPBURN  173 

JAMES  H.  ECKELS    -  187 

CHARLES  G.  DAWKS  215 

WILLIAM  B.  RIDOELY  248 

CASSIE  CHADWICK    -  263 

ASSIGNMENT  OF  THE  $500,000  NOTE  264 

BOGUS  TRUST  AGREEMENT  264 

ASSIGNMENT  OF  THE  $260,000  NOTE  264 

FORGED  CARNEGIE  NOTE  FOR  $250,000  266 

FORGED   CARNEGIE   NOTE   FOR  $500,000   -  266 

LAWRENCE  O.  MURRAY    -  801 

JOHN  SKELTON  WILLIAMS  448 
DANIEL  R.  CRIBSINGER     -                                                                  -     491 


THOMAS  P.  KANE 
Deputy  Comptroller  of  the  Currency 


INTRODUCTION 

SOME  years  ago  at  a  banquet  given  by  the  Bankers'  Associa- 
tion of  the  District  of  Columbia,  I  sat  next  to  an  eminent 
jurist  of  the  District  Bar.  During  the  course  of  the  evening 
our  conversation  drifted  to  the  subject  of  the  Currency  Bureau 
and  its  management,  and  after  relating  to  him  some  of  the  difficul- 
ties and  situations  which  frequently  confront  the  Comptroller  of 
the  Currency  in  his  supervision  of  the  national  banks,  he  remarked 
that  there  must  have  come  to  my  knowledge  during  my  long  con- 
nection with  the  service  many  incidents  similar  to  those  related 
which  would  make  a  very  interesting  narrative  if  assembled  in 
book  form. 

This  suggestion,  therefore,  is  responsible  for  the  publication 
of  this  volume,  and  is  my  apology  for  writing  it.  It  is  not  an 
essay  on  banking  and  currency,  nor  a  discussion  of  financial  or 
economic  theories.  It  is  simply  a  narrative  of  events  of  more  or 
less  importance  and  interest  in  the  history  of  the  National  Cur- 
rency Bureau  with  some  original  deductions  and  comments.  It 
contains  many  unvarnished  truths,  plainly  told,  with  no  attempt 
at  literary  excellence.  It  deals  with  men  and  measures,  methods 
and  motives  in  connection  with  the  administration  of  the  bureau, 
with  no  intention  of  contrasting  one  administration  with  another 
or  of  drawing  invidious  distinctions  between  them.  It  endeavors 
to  right  some  wrongs  where  injustice  has  been  done  and  to  correct 
some  erroneous  impressions  as  to  the  powers  and  duties  of  the 
Comptroller  of  the  Currency. 

In  May,  1886,  I  was  tendered  and  accepted  the  position  of 
Secretary  to  the  Comptroller  of  the  Currency,  by  William  L. 
Trenholm,  of  South  Carolina,  who  a  month  previously  had  been 
appointed  Comptroller.  I  was  sworn  in  and  entered  upon  the  dis- 
charge of  my  duties  May  16,  1886. 

Thus  began  a  period  of  service  in  the  Bureau  of  the  Currency, 
which  continued  uninterruptedly  for  more  than  thirty-six  years, 
undisturbed  by  political  or  other  changes  in  Federal,  depart- 
mental or  bureau  administration. 


2      ROMANCE  AND  TRAGEDY  OF  BANKING 

What  little  measure  of  success  I  may  have  attained  in  the 
bureau  with  which  I  have  been  connected  so  long,  I  owe  wholly  to  a 
faithful  and  conscientious  discharge,  to  the  best  of  my  ability, 
of  such  duties  as  were  assigned  to  me  from  time  to  time  in  the 
various  positions  which  I  held,  and  to  an  appreciation  of  my  serv- 
ices by  all  of  the  official  superiors  under  whom  I  have  had  the 
honor  to  serve,  and  whose  confidence  and  esteem,  I  am  proud  to 
say,  I  possessed  to  the  fullest  extent  during  their  respective  terms 
of  office  and  since  their  retirement  from  the  service,  with  a  single 
exception. 

It  has  been  my  privilege  and  my  pleasure  to  know  personally 
every  Comptroller  of  the  Currency  from  Hugh  McCulloch,  who 
organized  the  bureau  in  1863,  and  was  its  first  Comptroller,  down 
to  the  present  Comptroller,  Mr.  Crissinger,  with  the  exception  of 
Freeman  Clarke  and  Hiland  R.  Hulburd,  the  second  and  third 
Comptrollers,  and  to  have  served  five  of  them  in  the  confidential 
capacity  of  secretary.  These  five  were  William  L.  Trenholm, 
Edward  S.  Lacey,  A.  Barton  Hepburn,  James  H.  Eckels  and 
Charles  G.  Dawes — two  Democrats  and  three  Republicans.  Upon 
the  recommendation  of  Mr.  Dawes,  I  was  appointed  Deputy 
Comptroller  on  June  29,  1899,  to  succeed  Lawrence  O.  Murray. 

When  Mr.  Murray  resigned  as  Deputy  Comptroller,  Mr. 
Dawes,  who  was  then  Comptroller,  was  absent  in  the  West.  Some 
of  the  chiefs  of  division  and  others  connected  with  the  Comptrol- 
ler's office  were  applicants  for  the  place,  and  requested  me  to 
recommend  them  to  Mr.  Dawes  for  appointment  to  the  vacancy. 
I  wrote  to  Mr.  Dawes  at  Chicago,  advising  him  of  Mr.  Murray's 
resignation,  who  were  applicants  for  the  vacancy,  and  what  I 
knew  of  their  relative  merits  and  qualifications.  The  only  reply  I 
received  from  him  was  a  request  to  ask  Mr.  Murray  not  to  make 
public  his  resignation  until  he  returned  to  Washington.  The 
morning  following  Mr.  Dawes'  return  I  met  one  of  the  applicants 
in  the  corridor  of  the  Treasury  Department,  who  had  spent  the 
evening  before  at  Mr.  Dawes'  house  and  inquired  of  him  who  was 
to  be  the  new  deputy.  He  replied  that  while  he  knew,  he  was  not 
at  liberty  to  say,  but  that  I  would  learn  as  soon  as  Mr.  Dawes 
came  to  the  office.  When  Mr.  Dawes  arrived  at  the  office  he  said 
to  me  on  entering  the  room:  "Get  me  a  stenographer,  I  want  to 


ROMANCE  AND  TRAGEDY  OF  BANKING  3 

dictate  a  letter  to  the  Secretary  of  the  Treasury."  As  I  had 
always  done  his  stenographic  correspondence  I  thought  the 
request  unusual,  but  sent  for  one  of  the  office  stenographers.  Mr. 
Dawes  commenced  his  letter  to  the  Secretary  by  informing  him  of 
the  resignation  of  Mr.  Murray  and  concluded  by  recommending 
me  for  the  vacancy.  I  was  completely  surprised  when  I  heard 
my  name  mentioned,  and  told  Mr.  Dawes  that  I  was  not  an  appli- 
cant for  the  place  and  had  not  thought  of  myself  in  connection 
with  it.  He  replied  that  that  was  one  of  the  reasons  why  he 
had  recommended  me,  and  the  other  was  that  he  believed  me  to  be 
better  qualified  for  the  place  than  any  one  of  those  who  had 
applied  for  it. 

This  brief  narrative  of  how  I  became  connected  with  the 
Bureau  of  the  Currency  and  my  subsequent  advancement  grade 
by  grade  to  the  second  position  in  rank  in  the  bureau,  many  times 
and  for  long  periods  acting  as  its  head,  is  not  presented  in  any 
spirit  of  egotism,  but  simply  as  an  introduction  to  what  follows  in 
the  line  of  reminiscences  of  the  bureau  and  a  discussion  of  the 
principal  events  of  each  administration  since  the  establishment  of 
the  national  banking  system,  viewed  at  short  range  from  the  van- 
tage ground  of  the  opportunities  afforded  by  thirty-six  years' 
connection  with  the  Comptroller's  office,  a  close  association  with 
nine  Comptrollers,  and  a  personal  acquaintance  with  all  of  the 
Comptrollers  but  two  since  the  Currency  Bureau  was  established. 

THOMAS  P.  KANE. 
WASHINGTON,  OCTOBER,  1922. 


CHAPTER  I 

The  National  Bank  Act  and  Its  Origin 

IT  never  has  been  definitely  determined  who  is  entitled  to  the 
most  credit  for  having  originated  the  National  Bank  Act. 
Like  all  important  instruments  of  this  character,  it  is  con- 
ceded to  be  the  product  of  several  minds.  It  was  originally  a  war 
measure,  and  grew  out  of  the  urgent  necessities  of  the  Government 
to  replenish  the  public  treasury  by  creating  a  market  for  its  bonds 
through  the  inducement  offered  banks  to  obtain  circulation  based 
upon  the  security  of  such  bonds.  The  paramount  purpose  of  the 
Act  was  to  secure  a  uniform  national  banking  system  of  currency, 
without  the  creation  of  a  great  central  institution  like  the  old 
United  States  Bank.  Opposition  to  such  an  institution  was  wide- 
spread and  deep-seated  and  the  sponsors  of  the  various  plans 
which  took  final  shape  in  the  National  Banking  Act  were  careful 
to  point  out  that  the  objections  to  the  United  States  Bank  had 
been  duly  considered  and  had  been  avoided  by  them. 

In  August,  1861,  O.  B.  Potter  of  New  York  submitted  to  the 
Secretary  of  the  Treasury  a  scheme  to  permit  state  banks  and 
bankers  to  issue  notes  secured  by  United  States  bonds.  He  said 
that  none  of  the  objections  urged  against  a  United  States  bank 
could  lie  against  the  plan  proposed.  It  would  give  to  the  Govern- 
ment no  power  to  bestow  favors  and  would  not  place  a  dollar  in 
the  Government's  hands  to  lend.  It  was  impossible,  there- 
fore, it  was  claimed,  to  see  how  such  a  system  could  be  made  use 
of  for  political  ends. 

Samuel  Hooper,  a  member  of  the  House  of  Representatives 
from  Massachusetts,  who  was  an  active  agent  in  the  attainment 
of  the  end  sought,  said  in  support  of  one  of  the  early  measures 
proposed,  which  did  not  become  a  law,  that  it — 

secured  all  the  benefits  of  the  old  United  States  Bank 
without  many  of  those  objectionable  features  which  aroused 
opposition.  It  was  affirmed  that,  by  its  favors,  the  govern- 


6      ROMANCE  AND  TRAGEDY  OF  BANKING 

incut  enabled  that  bank  to  monopolize  the  business  of  the 
country.  Here  no  such  system  of  favoritism  exists  *  *  * 
It  was  affirmed  that  frequently  great  inconvenience  and 
sometimes  terrible  disaster  resulted  to  the  trade  and  com- 
merce of  different  localities  by  the  mother  bank  of  the 
United  States  arbitrarily  interfering  with  the  management 
of  the  branches  by  reducing  suddenly  their  loans  and  some- 
times withdrawing  large  amounts  of  their  specie,  for  poli- 
tical effect.  Here  each  bank  transacts  its  own  business 
upon  its  own  capital,  and  is  subject  to  no  demands  except 
those  of  its  own  customers  and  its  own  business.  It  will 
be  as  if  the  bank  of  the  United  States  had  been  divided  into 
many  parts,  and  each  part  endowed  with  the  life,  motion, 
and  similitude  of  the  whole,  revolving  in  its  own  orbit, 
managed  by  its  own  board  of  directors,  attending  to  the 
business  interests  of  its  own  locality;  and  yet  to  the  bills  of 
each  will  be  given  as  wide  a  circulation  and  as  fixed  a 
value  as  were  given  to  those  of  the  Bank  of  the  United 
States  in  its  palmiest  days. 

In  the  National  Banking  Act  as  passed  in  1863  it  was  believed 
that  the  desired  result  had  been  obtained. 

As  far  back  as  the  days  of  Alexander  Hamilton  and  Albert 
Gallatin,  the  question  of  creating  a  uniform  state  bank  currency 
was  frequently  discussed,  but  none  of  the  plans  of  the  distin- 
guished financiers  of  those  days  seemed  to  contemplate  govern- 
mental assumption  of  responsibility  for  the  redemption  of  such 
note  issues. 

Secretary  Dallas  in  1813  advocated  a  uniform  state  bank  cir- 
culation with  governmental  supervision  of  the  banks,  and  many  of 
the  features  of  his  plan  were  similar  to  those  contained  in  the 
National  Bank  Acts  of  1863  and  1864. 

In  1837,  the  State  of  Michigan  adopted  a  banking  law  which 
required  the  banks  to  deposit  with  the  State  Government  bonds 
and  mortgages  as  security  for  their  circulating  notes,  but  this  law 
was  subsequently  declared  by  the  State  courts  to  be  unconstitu- 
tional. 

The  Free  Banking  Law  adopted  by  the  State  of  New  York  in 
1838  was  also  analogous  to  the  national  banking  laws,  and  many 
of  the  provisions  of  the  latter  were  taken  therefrom.  There  was 


ROMANCE  AND  TRAGEDY  OF  BANKING      7 

one  radical  difference,  however,  between  the  State  and  the 
National  law  in  respect  to  circulation.  While  the  State  law 
required  security  for  circulation  to  be  deposited,  the  State  gov- 
ernment did  not  guarantee  or  assume  responsibility  for  the  re- 
demption of  the  circulation  beyond  the  amount  realized  for  the 
securities  held  when  sold. 

In  his  annual  report  for  1861,  Secretary  Chase  suggested  two 
plans  for  providing  the  country  with  a  circulating  medium.  The 
first  contemplated  the  gradual  retirement  from  circulation  of  the 
notes  of  private  corporations  and  the  issue  in  their  stead  of 
United  States  notes,  payable  in  coin,  on  demand,  in  amounts  suf- 
ficient to  meet  the  business  needs  of  the  country. 

The  second  plan  contemplated  the  preparation  by  the  Gov- 
ernment and  delivery  to  banking  institutions  for  circulation, 
under  governmental  supervision,  of  notes  to  be  secured  by  a 
pledge  of  United  States  bonds. 

Secretary  Chase  urged  the  adoption  of  one  or  the  other  of 
these  plans  as  a  measure  of  currency  reform  and  as  a  means  of 
replenishing  the  public  treasury.  He  stated  the  principal  features 
of  the  second  plan  to  be  as  follows : 

First.  A  circulation  of  notes  bearing  a  common  im- 
pression and  authenticated  by  a  common  authority. 

Second.  The  redemption  of  these  notes  by  the  associa- 
tion and  institution  to  which  they  may  be  delivered  for 
issue. 

Third.  The  security  of  redemption  by  the  pledge  of 
United  States  stocks  and  an  adequate  provision  of  specie. 

Without  undertaking  to  outline  in  detail  either  plan,  Secre- 
tary Chase  expressed  the  hope  that  Congress  would  give  the  latter 
suggestion  careful  consideration,  as  he  believed  it  would  not  only 
furnish  the  country  with  a  safe  and  uniform  circulating  medium, 
but  would  impart  such  value  and  stability  to  government  securi- 
ties as  would  make  it  possible  to  obtain  the  additional  loans  re- 
quired by  the  Government  at  fair  and  reasonable  rates,  especially 
if  the  public  credit  were  supported  by  sufficient  and  certain  pro- 
vision for  the  payment  of  interest  thereon  and  the  ultimate 
redemption  of  the  principal. 


8  ROMANCE  AND  TRAGEDY  OF  BANKING 

The  first  plan  suggested  by  Secretary  Chase  in  his  report  for 
1861,  was  evidently  based  upon  the  assumption  that  the  war  was 
to  be  of  short  duration,  and  while  this  plan  had  already  been 
partly  adopted  by  the  authorization  of  the  issue  of  Treasury 
notes,  it  soon  became  manifest  to  the  Secretary  that  the  possibili- 
ties of  disaster  which  might  result  from  a  continuance  of  this 
expedient  outweighed  any  advantage  that  could  be  derived  there- 
from. He  therefore  renewed  in  his  report  for  1862  the  recom- 
mendation he  made  in  his  report  of  the  previous  year  for  the 
enactment  of  a  national  banking  law,  and  recounted  the  benefits 
to  be  derived  by  the  Government  and  the  people  from  the  issue  of 
a  banknote  currency  of  uniform  design  and  value,  based  upon  the 
credit  of  the  nation,  setting  forth  at  the  same  time  his  objections 
to  the  issue  of  United  States  notes  as  a  permanent  system  of 
circulation. 

The  Secretary's  report  was  referred  by  the  House  of  Repre- 
sentatives to  the  Committee  on  Ways  and  Means  and  by  that 
Committee  to  a  sub-committee  composed  of  Hon.  E.  G.  Spaulding 
of  New  York,  chairman;  Mr.  Hooper  of  Massachusetts,  and  Mr. 
Corning  of  New  York. 

A  national  bank  bill  was  drafted  by  Mr.  Spaulding  in  Decem- 
ber, 1861,  and  reported  to  the  full  committee  for  consideration, 
but  so  much  opposition  to  the  measure  was  developed  in  com- 
mittee at  that  time  that  it  failed  to  receive  favorable  action.  In 
the  first  place,  it  was  not  believed  that  a  bill  of  that  nature  could 
be  passed  without  a  prolonged  discussion,  and,  in  the  second  place, 
if  it  did  pass,  it  was  not  thought  that  it  could  be  made  available 
quickly  enough  to  afford  the  Government  the  relief  it  so  urgently 
needed  to  meet  the  expenses  of  the  war.  The  attempt,  therefore, 
appears  to  have  been  temporarily  abandoned  by  Mr.  Spaulding, 
who  introduced  instead  the  Legal  Tender  Act  of  February  25, 
1862. 

On  July  11,  1862,  Mr.  Hooper  introduced  in  the  House  of 
Representatives  a  bill  to  provide  a  "National  currency  secured 
by  a  pledge  of  United  States  stocks,"  etc.,  and  received  authority 
by  resolution  of  the  House  to  have  printed  a  limited  number  of 
copies  of  this  bill. 


ROMANCE  AND  TRAGEDY  OF  BANKING  9 

On  February  2,  1863,  a  bill  was  reported  to  the  Senate  from 
the  Finance  Committee  by  Senator  Sherman,  entitled  "An  Act  to 
provide  a  national  currency,  secured  by  a  pledge  of  United  States 
bonds,  and  to  provide  for  the  circulation  and  redemption  thereof." 
This  was  the  same  bill,  with  some  changes  in  details,  that  was 
introduced  in  the  House  of  Representatives  by  Mr.  Hooper  sev- 
eral months  previously. 

In  reporting  this  bill  to  the  Senate,  Senator  John  Sherman 
said: 

We  are  about  to  choose  between  a  permanent  system, 
designed  to  establish  a  uniform  national  currency  based 
upon  the  public  credit,  limited  in  amount,  and  guarded 
by  all  the  restraints  which  the  experience  of  men  has 
proved  necessary,  and  a  system  of  paper  money  without 
limit  as  to  amount,  except  for  the  growing  necessities 
of  war.  In  the  consideration  of  such  a  question,  we  should 
surely  sacrifice  all  local  interests,  all  pride  of  opinion  and 
while  acting  promptly  under  the  pressure  of  events,  we 
should  bring  to  our  aid  all  the  wisdom  of  united  coun- 
sels and  all  the  light  which  the  experience  of  former  gen- 
erations of  men  can  give  us. 

Referring  at  the  same  time  to  the  expedient  previously  re- 
sorted to,  of  issuing  United  States  notes,  he  said : 

Another  practical  objection  to  these  United  States 
notes  is,  that  there  is  no  mode  of  redemption.  They  are 
safe.  They  are  of  uniform  value,  but  there  is  no  mode 
pointed  out  by  which  they  are  to  be  redeemed.  No  one 
is  bound  to  redeem  them.  They  are  receivable  but  not  con- 
vertible. They  are  debts  of  the  United  States,  but  they 
cannot  be  presented  anywhere  for  redemption.  No  man  can 
present  them,  except  for  the  purpose  of  funding  them  into 
the  bonds  of  the  United  States.  They  are  not  convertible. 
Thej'  lack  that  essential  element  of  any  currency.  They 
can  only  be  used  during  the  war.  The  very  moment  that 
peace  comes,  all  this  circulation  that  now  fills  the  channels 
of  commercial  operations  will  be  at  once  banished.  They 
will  be  converted  into  bonds,  and  then  the  contraction  of 
prices  will  be  as  rapid  as  the  inflation  lias  been.  The  issue 


10  ROMANCE  AND  TRAGEDY  OF  BANKING 

of  government  notes  can  only  be  a  temporary  measure,  and 
is  only  intended  as  a  temporary  measure  to  provide  a  nation- 
al currency. 

But,  it  is  asked,  why  look  at  all  to  the  interests  of  the 
banks?  Why  not  directly  issue  the  notes  of  the  government, 
and  thus  save  to  the  people  the  interest  on  the  debt  rep- 
resented by  the  notes  in  circulation? 

The  only  answer  to  this  question  is  that  history  teaches 
us  that  the  public  faith  of  a  nation  alone  is  not  sufficient  to 
maintain  a  paper  currency.  There  must  be  a  combination 
between  the  interests  of  private  individuals  and  the  govern- 
ment. 

After  debating  this  bill  for  ten  days,  it  passed  the  Senate  by 
a  vote  of  23  ayes  to  21  nays.  And,  but  for  the  personal  appeals 
made  for  the  bill  by  Secretary  Chase  and  Senator  Sherman,  it 
undoubtedly  would  have  failed  of  passage  in  the  Senate,  as  Sen- 
ator Anthony  was  known  to  be  opposed  to  it,  and  Senator  Sher- 
man says  in  "John  Sherman's  Recollections"  that  "Senator  An- 
thony voted  for  the  bill  because  Secretary  Chase  convinced  him 
that  it  was  necessary  to  carry  on  the  war." 

After  passing  the  Senate,  the  bill  went  to  the  House  of  Repre- 
sentatives, where  it  remained  on  the  Speaker's  table  from  the 
12th  to  the  19th  of  February,  a  motion  to  refer  it  to  the  Com- 
mittee of  the  Whole  having  been  defeated. 

Mr.  Spaulding,  who  is  credited  with  having  prepared  the 
original  draft  of  the  bill,  opened  the  debate  upon  it  in  the  House, 
and  in  the  course  of  a  long  speech  said : 

I  shall  vote  for  it,  not  that  it  would  afford  any  con- 
siderable relief  to  the  treasury  in  the  next  two  or  three 
years,  but  because  I  regard  it  as  the  commencement  of  a 
permanent  system  for  providing  a  national  currency  that 
would,  if  wisely  administered,  be  of  great  benefit  to  the 
people  and  a  reliable  support  to  the  government  in  the 
future. 

The  bill  passed  the  House  of  Representatives  on  February 
20th,  by  a  vote  of  78  ayes  to  64  nays,  and  became  a  law  on  Febru- 
ary 25,  1863,  with  the  approval  of  the  President. 


ROMANCE  AND  TRAGEDY  OF  BANKING  11 

This  Act,  however,  while  admirable  in  design,  was  very  crudely 
constructed,  and  contained  numerous  defects.  It  was,  as  Hugh 
McCulloch  stated  in  his  book  entitled  "Men  and  Measures  of  a 
Half  Century,"  very  unsymmetrical  in  arrangement  and  glar- 
ingly inconsistent  in  many  of  its  provisions.  It  was  full  of  am- 
biguities and  many  words  of  different  significance  were  used  as 
interchangeable  terms,  making  their  meaning  uncertain  and  diffi- 
cult of  interpretation. 

To  correct  these  numerous  defects  and  to  supply  omissions, 
which  the  practical  operation  of  the  law  soon  demonstrated  to  be 
essential,  it  became  necessary  within  fourteen  months  from  the 
date  of  its  passage  to  revise  the  entire  act  by  the  adoption  of  the 
Act  approved  June  3,  1864,  under  the  same  title. 

This  latter  act,  with  such  amendments  thereof  as  have  since 
been  enacted,  constituted  the  national  banking  laws.  The  title, 
however,  was  changed  by  the  Act  of  June  20,  1874,  which  pro- 
vides that  the  Act  entitled  "An  act  to  provide  a  national  cur- 
rency secured  by  a  pledge  of  United  States  bonds,  and  to  provide 
for  the  circulation  and  redemption  thereof,  approved  June  3, 
1864,  shall  hereafter  be  known  as  'The  National  Bank  Act.' ' 

The  Act  of  1863  authorized  the  issue  of  circulation  to  any 
State  bank  existing  at  the  time  of  its  passage,  which  was  the 
owner  and  holder  of  United  States  bonds,  to  the  amount  of  fifty 
per  centum  of  its  capital  stock,  under  the  same  conditions  as  cir- 
culation was  issued  to  national  banks,  except  that  the  amount  of 
such  issues  could  not  exceed  fifty  per  centum  of  the  capital  stock 
of  the  bank  or  the  market  value  of  the  bonds  deposited.  This 
privilege  was  not  conferred  upon  State  banks  by  the  Act  of  1864, 
and  no  circulation  ever  was  issued  to  State  banks  under  the  Act 
of  1863,  as  no  such  bank  ever  availed  itself  of  this  provision. 

Fifty-nine  years  have  gone  by  since  the  adoption  of  the  Na- 
tional Bank  Act,  and  12,230  banks  have  been  chartered  under 
its  provisions,  including  2292  State  banks  converted  into  na- 
tional associations1.  It  never  was  a  perfect  measure.  Perfec- 
tion was  not  claimed  for  it  at  the  time  of  its  enactment  by  any  of 
its  most  ardent  supporters.  It  was  born  during  a  period  of  in- 


'June  30,  1922. 


12  ROMANCE  AND  TRAGEDY  OF  BANKING 

ternal  strife,  and  necessity  was  its  parent.  That  it  did  not  develop 
perfection  and  improve  with  age  is  due  altogether  to  the  environ- 
ment of  its  birth  and  want  of  proper  legislative  nourishment  and 
attention  as  it  grew  to  maturity.  But  notwithstanding  its  many 
imperfections,  it  stood  the  test  of  time  and  furnished  to  the  nation 
the  best  banking  system  it  had  ever  known. 

The  National  Bank  Act  was  not  afflicted  with  any  incurable 
maladies,  as  some  theoretical  financiers  represented  it  to  be.  Its 
ailments  were  from  time  to  time  thoroughly  diagnosed  and  were 
well  understood.  Its  principal  weakness  was  due  to  a  sluggish 
circulation,  which  would  readily  have  responded  to  treatment  if 
the  proper  legislative  remedies  had  been  applied. 

The  principal  remedies  necessary  to  the  perfection  and  per- 
petuation of  the  system  were  (1)  the  injection  of  such  elasticity 
into  the  circulation  of  the  banks  as  would  have  enabled  it  at  all 
times  to  automatically  expand  and  contract  in  proportion  to  the 
legitimate  business  demands  made  upon  it;  (2)  the  adoption  of 
such  additional  safeguards  as  would  have  added  to  the  security 
of  depositors  and  other  creditors,  increased  confidence  in  the 
soundness  and  stability  of  the  banks,  and  minimized  liability  to 
failure,  and  (3)  such  an  enlargement  of  the  corporate  powers  of 
the  banks  as  would  have  enabled  them  to  transact  some  of  the 
business  which  had  become  necessarily  incidental  to  commercial 
banking  subsequent  to  the  enactment  of  the  original  act. 

The  Federal  Reserve  Act,  approved  December  23,  1913,  reme- 
died some  of  these  delinquencies  by  providing  a  circulating 
medium  sufficiently  elastic  to  readily  supply  the  periodical  de- 
mands for  additional  currency  for  crop  moving  purposes  and 
increased  industrial  or  commercial  activity,  and  for  the  automatic 
retirement  of  this  currency  when  no  longer  required  for  legitimate 
business. 

It  provided  also  for  the  mobilization  of  bank  reserves  and 
their  availability  when  needed. 

These  and  other  provisions  of  the  Federal  Reserve  Act  have 
immensely  improved  and  strengthened  the  laws  relating  to  cur- 
rency issues,  and  otherwise  enlarged  the  scope  of  powers  of  the 
banks  along  the  lines  above  suggested. 


CHAPTER  II 


THE  National  Currency  Bureau,  or  the  Office  of  the  Comp- 
troller of  the  Currency,  as  it  is  generally  known,  was  estab- 
lished May  9,  1863,  by  the  appointment  and  qualification 
of  Hon.  Hugh  McCulloch  as  Comptroller,  and  the  selection  by 
him  of  a  working  force  consisting  of  three  clerks,  two  copyists 
and  one  messenger.  The  messenger  was  John  Joy  Edson,  who 
subsequently  became  one  of  Washington's  most  prominent  citi- 
zens and  business  men  and  was  President  of  two  of  its  principal 
and  most  successful  financial  institutions. 

No  bureau  of  the  several  executive  departments  of  the  Federal 
government  has  borne  a  closer  or  more  important  relation  to  the 
business  interests  of  the  country  at  large  than  the  National  Cur- 
rency Bureau,  and  no  bureau  officer  is  vested  by  law  with  greater 
responsibilities  or  more  independent  powers  of  action  than  the 
Comptroller  of  the  Currency. 

It  evidently  was  the  desire  and  intention  of  the  f  ramers  of  the 
National  Bank  Act  to  make  the  office  of  the  Comptroller  a  non- 
political  office  and  to  remove  it  as  far  as  practicable  from  the 
influences  incident  to  the  quadrennial  changes  in  party  or  politi- 
cal administration  of  the  Federal  government.  To  this  end  the 
term  of  the  Comptroller  was  fixed  by  the  original  and  the  amend- 
atory acts  at  five  years,  and  he  was  required  to  report  annually 
direct  to  Congress,  instead  of  to  the  head  of  the  Treasury  De- 
partment, as  other  department  bureau  officers  are  required  to  do. 

The  purpose  of  this  latter  requirement  was  to  enable  the 
Comptroller  to  present  to  Congress  for  consideration  his  inde- 
pendent views  and  recommendations  in  regard  to  the  conditions 
and  necessities  of  the  banking  interests  and  currency  needs  of  the 
country,  free  from  censorship  by  his  official  superior,  the  head  of 
the  Treasury  Department. 

The  impression  seems  to  prevail  that  the  provision  in  the 
statute  fixing  the  tenure  of  office  of  the  Comptroller  of  the  Cur- 


Lt 


14  ROMANCE  AND  TRAGEDY  OF  BANKING 

rency  at  five  years  prevented  the  removal  of  this  official  during  his 
term,  except  by  impeachment.  Such,  however,  is  not  the  case. 

The  Act  of  February  25,  1863,  contained  a  provision  that  the 
Comptroller  "shall  hold  his  office  for  the  term  of  five  years,  unless 
sooner  removed  by  the  President  by  and  with  the  advice  and  con- 
sent of  the  Senate." 

When  the  bill  to  amend  this  act  was  before  the  Senate  for 
consideration,  in  April,  1864,  it  was  proposed  to  amend  this  sec- 
tion by  striking  out  the  words  by  and  with  the  advice  and  con- 
sent of  the  Senate  and  make  the  provision  read,  shall  hold  his  office 
for  the  term  of  five  years  unless  sooner  removed  by  the  President. 

A  study  of  the  debate  in  the  Senate  on  this  proposed  amend- 
ment may  prove  of  interest  as  showing  the  intent  of  the  legislators 
in  connection  with  this  provision  of  law  as  finally  adopted.  This 
debate  will  be  found  in  the  Congressional  Globe  of  April  26,  1864, 
as  follows: 

Senator  Grimes :  I  should  like  to  inquire  why  the  com- 
mittee propose  to  make  this  change.  I  remember  that  this 
clause  was  put  in  the  bill  of  last  year  upon  great  considera- 
tion, in  order  to  prevent  this  officer  from  being  a  mere 
political  officer,  as  he  doubtless  will  be,  if  he  is  to  be  turned 
out  without  any  consultation  with  the  Senate.  I  should  like 
to  know  what  change  has  come  over  the  spirit  of  the  dream 
of  the  Finance  Committee  on  that  subject. 

Senator  Fessenden:  The  reason  why  that  clause  was 
stricken  out  by  the  Committee  on  Finance  was  simply  this : 

That  provision  is  in  the  original  bill  that  we  passed  last 
year.  It  was  put  into  the  original  bill  because  it  was  thought 
advisable  that  this  office  should  be  in  a  very  particular 
degree  independent  of  political  changes  and  political  con- 
siderations. There  seemed  to  be  a  necessity  for  a  degree  of 
permanency  and  a  degree  of  independence  in  this  officer  that 
did  not  apply  to  others,  and  it  was  agreed  to.  When 
it  came  up  this  year  in  the  same  shape  the  attention  of  the 
committee  was  called  to  it,  and  we  came  to  the  conclusion 
that  there  might  be  difficulties  in  such  a  case  even  in  carry- 
ing that  out. 

In  the  first  place,  it  is  establishing  a  new  rule.  It  is  ques- 
tionable whether  the  President  has  not  the  power  of  ap- 


ROMANCE  AND  TEAGEDY  OF  BANKING  15 

pointing  this  officer  and  removing  him,  even  if  this  provision 
should  remain  in  the  bill.  It  has  been  held  in  all  other 
cases  that  the  power  of  removal  was  a  necessary  consequence 
of  the  power  of  appointment;  that  when  the  President  ap- 
pointed an  officer  who  was  provided  for  by  law  that  was 
all  very  well;  but  he  might  at  any  time  appoint  another  in 
his  place,  as  the  power  of  appointment  was  vested  in  him, 
and  that  power  of  appointment  necessarily  involved  the 
power  to  remove  the  incumbent  when  the  President  ap- 
pointed a  new  officer. 

On  the  contrary,  it  is  said  with  regard  to  an  office  cre- 
ated by  Congress,  Congress  has  the  right  to  fix  such  limita- 
tions upon  it  with  reference  to  the  power  of  removal 
as  it  sees  fit.  That  is  a  doctrine  that  has  never  been  acceded 
to  herefore.  At  any  rate,  this  made  an  exception  to  all 
rules,  even  with  regard  to  military  officers.  The  President 
has  always  exercised  the  power  to  strike  any  man  from  the 
list  of  officers  in  the  army  if  he  saw  fit  to  do  so,  as  we  have 
with  a  view  rather  to  acknowledge  that  power  and  to  induce 
its  exercise  in  the  present  condition  of  the  country,  made  a 
special  provision  of  law,  I  believe,  on  that  subject. 

The  difficulty  in  this  case  is  this:  If  you  provide  that 
the  Comptroller  of  the  Currency  shall  only  be  removed  by 
and  with  the  advice  and  consent  of  the  Senate,  it  may 
happen  that  in  the  recess  of  Congress  this  officer  may  be 
unfaithful.  He  will  wield  an  immense  power  in  the  country 
over  all  these  banks  with  this  accumulated  capital,  and  he 
could  in  the  course  of  a  very  short  time,  if  he  were  disposed 
to  do  so,  produce  the  most  disastrous  effects  upon  the  cur- 
rency of  the  country  by  his  own  motion.  It  will  be  difficult 
to  say  that  the  President  should  not  have  the  power  to 
remove  him  if  he  was  found  to  be  exercising  the  power  of 
his  office  in  that  way.  There  is  that  danger  always,  and 
that,  perhaps,  was  the  great  argument  that  made  the  con- 
struction of  this  power  what  it  is;  that  necessarily,  as 
Congress  is  not  always  in  session,  the  President  must  have 
the  power  of  removal  in  order  to  guard  against  evils  that 
might  follow  from  unfaithful  officers  who  would  otherwise 
hold  their  positions  contrary  to  the  interests  of  the  govern- 
ment. It  is  desirable  at  all  times,  if  this  provision  is  re- 
tained, that  the  President  shall  have  the  power  to  suspend 


16  ROMANCE  AND  TRAGEDY  OP  BANKING 

for  a  time  for  sufficient  cause  the  powers  of  the  Comp- 
troller of  the  Currency  until  the  meeting  of  Congress,  and 
then  report  to  Congress  the  reasons  why  he  has  thus  sus- 
pended him. 

This  matter,  however,  came  up  this  morning  in  the  Com- 
mittee on  Finance,  and  it  was  thought  advisable  on  the 
whole  to  leave  the  amendment  stand,  as  we  originally  re- 
ported it,  striking  out  this  clause,  presuming  that  the  House 
of  Representatives  would  insist  (as  it  usually  does)  upon 
its  own  views  in  relation  to  this  important  amendment  of 
the  bill,  and  it  would  result  in  a  committee  of  conference, 
when  something  could  be  arranged  between  the  two  commit- 
tees that  would  be  effective  in  relation  to  it. 

For  myself,  while  I  see  the  force  of  the  argument  that 
this  office  ought  to  be  in  a  great  degree  independent,  I  also 
see  the  force  of  the  argument  that  the  power  of  suspending 
him  should  exist  in  the  President,  because  otherwise  during  a 
recess  of  Congress  the  great  interests  of  the  community 
might  be  left  to  the  mercy  of  the  Comptroller  of  the  Cur- 
rency, if  he  should  happen  to  be  an  unfaithful  man.  We 
thought  the  clause,  as  it  stood,  might  be  unsafe  in  that 
particular  at  some  future  time,  and  on  the  whole,  we  con- 
cluded to  strike  out  the  clause,  thinking  that  it  would  result 
in  an  arrangement  with  reference  to  it  that  might  obviate 
the  difficulties  on  both  sides. 

Senator  Buckalew:  I  desire  to  move  an  amendment  to  the 
amendment  of  the  committee.  I  move  to  insert  the  follow- 
ing words  in  place  of  those  proposed  to  be  stricken  out:  "up- 
on reasons  to  be  reported  by  him  to  the  Senate,"  so  that 
the  clause  will  read:  "And  shall  hold  his  office  for  the  term 
of  five  years,  unless  sooner  removed  by  the  President,  upon 
reasons  to  be  reported  by  him  to  the  Senate." 

Senator  Fessenden:  I  think  that  would  hardly  meet  the 
difficulty,  because  it  makes  his  reasons  conclusive  whether 
the  Senate  likes  them  or  not.  It  leaves  the  power  of  re- 
moval just  exactly  where  it  should  be,  if  this  clause 
should  be  stricken  out  altogether,  only  the  Presi- 
dent is  compelled  to  report  his  reasons  to  the  Senate. 
If  the  reasons  are  satisfactory  to  himself  they  are  to  operate. 
They  might  not  be  satisfactory  to  the  Senate,  but  still  that 
would  produce  no  effect  upon  the  act  itself.  I  think,  there- 


ROMANCE  AND  TRAGEDY  OF  BANKING  17 

fore,  that  the  amendment  to  the  amendment  would  not  cure 
the  evil. 

Senator  Pomeroy:  The  effect  of  it  would  be  that  if  the 
Senate  did  not  approve  of  the  reasons  given  by  the  President 
they  could  refuse  to  confirm  the  successor  appointed  to  the 
previous  Comptroller. 

Senator  Fessenden:  That  would  only  make  confusion. 
It  is  necessary  that  the  office  should  be  filled. 

Senator  Howard:  I  hope  the  Senate  will  concur  in  the 
amendment  of  the  committee  conditionally,  for  I  regard  it 
as  a  well  settled  law  that  under  the  Constitution  of  the 
United  States  the  President  has  the  absolute  power  of 
appointment  and  the  equally  absolute  power  of  removal. 
I  am  not  able  to  see  what  authority  we  have  to  annex  any 
conditions  or  limitations  to  the  President's  power  of  removal 
from  office.  If  he  has  the  power  of  appointment,  and  if  the 
power  of  removal  is  an  incident  to  the  power  of  appoint- 
ment, then  we  have  nothing  to  do  with  it,  and  we  can  only 
leave  the  responsibility  to  the  President  himself.  Suppose 
we  should  adopt  the  amendment  suggested  by  the  Senator 
from  Pennsylvania,  and  the  President  should  see  fit  to 
remove  this  officer  without  giving  to  Congress  any  reasons 
whatever,  what  would  be  the  result  in  law?  Would  he,  or 
would  he  not  be  actually  removed?  Would  he  remain  in 
office  because  the  Persident  had  not  given  reasons  for  his 
removal,  or  what  would  be  his  condition?  I  should  really 
like  to  understand  from  the  honorable  Senator  from 
Pennsylvania  what  would  be  the  logical  consequences.  I 
think  that  the  reasons  given  by  the  honorable  Chairman 
of  the  Committee  on  Finance  for  the  amendment  which 
that  Committee  has  suggested,  are  perfectly  satisfactory 
and  perfectly  conclusive.  Let  us  leave  to  the  President  his 
full  responsibility  for  exercising  the  laws  and  hold  him  to 
that  responsibility  before  the  people. 

The  bill  passed  the  Senate  and  was  referred  to  a  conference 
committee  of  the  two  Houses,  and  finally  became  a  law  with  the 
provision  in  regard  to  the  tenure  of  office  of  the  Comptroller, 
reading  as  follows : 


18  ROMANCE  AND  TRAGEDY  OF  BANKING 

Shall  hold  his  office  for  the  term  of  five  years,  unless 
sooner  removed  by  the  President,  upon  reasons  to  be  com- 
municated by  him  to  the  Senate. 

This  provision  of  law  has  remained  the  same  to  the  present 
time,  and  although  the  Comptroller  is  appointed  for  a  term  of 
five  years,  he  virtually  holds  his  office  at  the  pleasure  of  the  Presi- 
dent, and  may  be  removed  at  any  time,  for  reasons  which  the 
President  may  deem  sufficient. 


Composition  of  the  Currency  Bureau 

The  Currency  Bureau  is  composed  of  seven  divisions,  each  of 
which  has  a  chief  and  a  corps  of  clerks  with  distinct  and  well 
defined  duties.  The  regular  working  force  of  the  office,  Janu- 
ary 1,  1922,  including  chiefs  of  divisions,  numbered  two  hundred 
and  twenty-seven. 

In  addition  to  this  office  force,  on  January  1,  1922,  there  were 
employed  in  the  field,  one  hundred  and  ninety-seven  national  bank 
examiners  and  two  hundred  and  ninety  assistant  examiners  en- 
gaged in  the  examination  of  banks,  who  make  full  and  detailed 
reports  to  the  Comptroller  of  the  condition  of  the  banks  exam- 
ined, on  specially  prepared  blanks.  There  were  also  employed 
in  the  Chief  Examiners'  offices,  one  hundred  and  ten  clerks  en- 
gaged in  clerical  work  in  connection  with  the  examination  of  the 
banks. 

The  Federal  Reserve  Act  requires  each  bank  to  be  examined 
not  less  than  twice  in  each  calendar  year,  but  many  banks  are 
examined  more  frequently  according  to  the  condition  shown  by 
the  previous  report.  Examiners'  reports  are  treated  as  confi- 
dential communications,  are  carefully  guarded,  and  copies  are 
never  furnished  except  to  the  bank  itself  and  to  the  Federal  Re- 
serve Bank  of  the  district  in  which  the  bank  is  located. 

In  addition  to  the  reports  of  examination  received  from  each 
bank  examiner,  every  bank  is  required  by  law  to  make  five  reports 
of  condition  each  year,  for  a  past  date  fixed  by  the  Comptroller, 
without  previous  notice,  sworn  to  by  the  cashier  of  the  bank,  or 


19 

the  president,  and  attested  by  at  least  three  directors,  on  forms 
prescribed  and  furnished  by  the  Comptroller. 

These  reports  are  carefully  examined  by  the  clerks  of  the 
office,  and  systematically  tabulated,  first  by  States,  and  reserve 
cities,  and  finally  totaled  for  the  United  States.  These  abstracts 
contain  a  vast  amount  of  valuable  statistical  information  of  great 
interest  to  bankers,  statisticians  and  writers  on  financial  subjects 
generally,  both  in  this  and  other  countries.  The  bureau  is  well 
organized,  the  personnel  is  efficient,  and  the  systematic  manner  in 
which  the  work  is  handled,  with  the  use  of  labor-saving  devices, 
enables  the  force  to  dispose  of  the  vast  and  constantly  increasing 
volume  of  business  with  promptness  and  despatch,  so  that  the 
current  work  of  the  bureau  may  be  said  to  be  always  up  to  date. 

National  Bank  Circulation  First  Printed  Under  Contract 

The  Bureau  of  Engraving  and  Printing,  in  which  all  national 
bank  notes  and  other  securities  of  the  Government  are  now 
printed,  was  organized  in  1862,  under  authority  of  an  Act  of 
Congress,  approved  July  11,  1862,  entitled  "An  Act  to  authorize 
an  additional  issue  of  United  States  notes,  and  for  other 
purposes." 

This  Act  authorized  the  Secretary  of  the  Treasury,  if  he 
deemed  it  expedient  to  have  the  United  States  notes  engraved  and 
printed  by  contract,  to  cause  them,  or  any  part  of  them,  to  be 
engraved,  printed  and  executed  in  such  form  as  he  should  pre- 
scribe at  the  Treasury  Department  in  Washington  under  his 
direction,  and  to  purchase  and  provide  all  the  machinery  and 
materials  and  to  employ  such  persons  and  appoint  such  officers 
as  may  be  necessary  for  that  purpose. 

The  printing  of  national  bank  currency  was  commenced  in 
1863.  The  first  notes  were  printed  in  that  year.  At  that  time 
all  Government  securities  were  printed  in  New  York  City  by  the 
Continental,  American  and  National  Bank  Note  Companies.  The 
notes  printed  by  these  companies  were  delivered  to  the  Treasury 
Department  in  an  unfinished  condition.  After  being  entered  on 
the  books  in  the  office  of  the  Comptroller  of  the  Currency  the}* 
were  sent  to  the  Bureau  of  Engraving  and  Printing,  where  the 


20  ROMANCE  AND  TRAGEDY  OF  BANKING 

seal  of  the  Treasury  Department  was  placed  on  each  note.  The 
Bureau  of  Engraving  and  Printing  was  at  that  time  located  on 
the  upper  floor  of  the  Treasury  Building. 

The  Act  of  June  20,  1874,  required  that  all  notes  printed 
after  the  approval  of  that  act  should  bear  the  charter  number 
of  the  bank  issuing  the  notes.  All  notes  on  hand  in  the  Comp- 
troller's vault  at  that  time  were  sent  to  the  Bureau  to  have  the 
charter  number  of  the  banks  placed  thereon  before  issues  were 
made. 

The  Bureau  of  Engraving  and  Printing  was  removed  to  the 
building  adjoining  the  one  it  now  occupies  in  1875.  All  engraving 
and  printing  connected  with  Government  securities  was  then 
transferred  to  that  bureau  from  New  York  City  and  since  that 
time  has  been  executed  under  the  direction  of  the  Secretary  of 
the  Treasury,  commencing  at  the  beginning  of  the  fiscal  year 
July  1,  1875'. 

A  new  series  of  national  bank  notes  was  then  adopted,  known 
as  the  Series  of  1875.  The  seal  upon  these  notes  was  changed 
from  the  original  saw-tooth  seal  to  the  round  seal  with  scalloped 
edges,  and  the  legend  "Series  of  1875"  was  printed  across  their 
face  in  red  ink.  This  series  of  notes  continued  to  be  issued  until 
the  passage  of  the  Act  of  July  12,  1882,  providing  for  the  exten- 
sion of  charters  of  national  banks,  when  the  Series  of  1882  was 
adopted,  and  this  series  was  issued  to  all  new  banks  organized 
after  that  date  as  well  as  to  the  banks  extending  their  charters. 

The  Act  of  April  12,  1902,  provided  for  a  further  extension 
of  the  corporate  existence  of  the  banks,  when  the  present  series 
of  notes,  known  as  the  Series  of  1902,  was  adopted  and  were 
issued  to  all  banks  re-extending  their  charters  as  well  as  to  all 
new  banks  organized  since  that  date. 

When  the  Series  of  1882  notes  was  adopted  the  only  entirely 
new  design  was  that  of  the  notes  of  the  five  dollar  denomination, 
containing  the  vignette  of  President  Garfield.  The  other  notes, 
of  the  denominations  of  ten,  twenty,  fifty  and  one  hundred  dol- 
lars, were  made  from  the  original  plates  of  the  old  series,  amended 
by  inserting  on  the  margin  of  the  note  the  charter  number  of  the 
bank  in  six  places  and  changing  the  seal  of  the  Treasury  Depart- 


ROMANCE  AND  TRAGEDY  OF  BANKING  21 

ment  from  the  small  scalloped  seal  to  the  larger  one  of  practi- 
cally the  same  design. 

As  the  notes  authorized  by  the  original  act,  of  a  higher  de- 
nomination than  one  hundred  dollars,  had  been  practically  dis- 
carded by  the  banks,  on  account  of  the  cost  of  maintenance,  notes 
of  these  denominations  have  not  been  printed  since  1882. 

The  Act  of  May  30,  1908,  authorized  the  issue  of  notes  of 
the  denomination  of  ten  thousand  dollars,  but  none  of  this  amount 
ever  has  been  ordered  by  the  banks  and  no  designs  for  this  denomi- 
nation ever  have  been  prepared. 

Previous  to  the  passage  of  the  Act  of  June  20,  1874,  national 
banknote  plates  were  engraved  and  the  circulation  printed  there- 
from at  the  expense  of  the  Government,  but  a  provision  in  that 
Act  required  each  association  thereafter  organized  to  reimburse 
the  Treasury  Department  the  cost  of  engraving  the  plates,  since 
which  time  the  banks  have  paid  for  their  plates. 

The  National  Currency  Bureau  has  been  the  source  of  consid- 
erable revenue  to  the  Government  since  its  establishment,  and  has 
been  more  than  self-sustaining.  The  receipts  from  tax  on  circu- 
lation and  other  sources  from  1863  to  June  30,  1921,  amounted 
to  over  $155,188,318.23.  The  operating  expenses  of  the  bureau 
during  the  same  period  amounted  to  over  $20,965,820,  leaving  a 
net  balance  or  profit  to  the  Government  of  over  $134,222,498,  or 
an  annual  average  profit  of  over  $231,418,  during  the  fifty-eight 
years  of  the  bureau's  existence. 

First  Bank  Organized 

It  is  generally  conceded,  and  the  fact  is  borne  out  by  the 
records  of  the  Comptroller's  office,  that  the  first  bank  to  open  for 
business  under  a  national  bank  charter  was  the  First  National 
Bank  of  Davenport,  Iowa. 

The  charter  number  of  this  bank  was  fifteen.  The  earliest 
paper  on  file  in  the  Comptroller's  office  pertaining  to  this  bank- 
bears  date  of  May  29,  1863.  The  bank  was  chartered  on  June  24, 
1863,  and  opened  for  business  June  29,  1863. 

In  the  history  of  this  bank,  prepared  by  Hon.  A.  F.  Dawson, 
a  former  member  of  Congress,  and  later  president  of  the  bank, 


22  ROMANCE  AND  TRAGEDY  OF  BANKING 

it  is  stated  that  application  for  a  national  charter  was  made  on 
February  24,  1863,  and  was  received  at  the  Treasury  Depart- 
ment on  February  26,  1863. 

The  first  bank  to  receive  a  certificate  of  authority  to  begin 
business  as  a  national  association  was  the  First  National  of 
Philadelphia,  Pa.  This  bank  was  given  Charter  No.  1,  dated 
June  20,  1863,  but  it  did  not  open  for  business  until  Julv  11, 
1863. 


HUGH  McCULLOCH 
First  Comptroller  of  the  Currency,  1863-1865 


CHAPTER  III 

Hugh  McCulloch 

HUGH   McCULLOCH   was    appointed    Comptroller   of   the 
Currency,    March    9,    1863,    and    held    the    office    until 
March   8,    1865.     He   was    born    at    Kennebunk,    Maine, 
December  7,  1808.     In  1824  he  entered  Bowdoin  College,  but  on 
account  of  ill  health  he  was  obliged  to  leave  the  institution  in 
1826.     He  subsequently  engaged  in  teaching  school,  and  later 
studied  law. 

In  McCulloch's  "Men  and  Measures  of  a  Half  Century,"  he 
gives  a  very  interesting  account  of  how  he  was  selected  to  be  the 
first  Comptroller  of  the  Currency  and  the  circumstances  under 
which  he  accepted  the  appointment.  He  states  that  in  1862  he 
went  to  Washington  for  the  purpose  of  opposing  the  establish- 
ment of  the  national  banking  system,  upon  the  ground  that  it 
might  prove  greatly  prejudicial  to  the  State  banks.  He  was  at 
that  time  president  of  the  State  Bank  of  Indiana,  one  of  the  larg- 
est banking  institutions  in  the  country,  the  main  office  of  which 
was  located  at  Indianapolis.  His  connection  with  this  bank  began 
in  October,  1835,  when  he  was  appointed  cashier  and  manager  of 
the  Fort  Wayne  branch  of  this  institution.  He  was  a  lawyer  by 
profession  and  previous  to  his  acceptance  of  the  cashiership  of 
this  bank  had  had  no  banking  experience.  When  the  Bank  of  the 
State  of  Indiana  was  organized  in  1857,  to  succeed  the  State 
Bank  of  Indiana,  he  was  chosen  as  its  first  president  and  con- 
tinued his  connection  with  this  institution  in  that  capacity  until 
he  resigned  in  April,  1863,  to  accept  appointment  as  Comptroller 
of  the  Currency. 

Although  Mr.  McCulloch  was  originally  opposed  to  the 
national  banking  system  his  opinion  underwent  a  complete  change 
after  the  bank  act  became  a  law,  and,  because  of  this  fact,  he 
stated,  the  tender  of  the  position  of  Comptroller  of  the  Currency 
to  him  by  Secretary  Chase  was  not  only  wholly  unexpected,  but 
was  exceedingly  embarrassing. 

23 


24 

In  a  letter  written  to  a  friend,  published  in  The  Bankers 
Magazine,  he  said: 

The  national  system  of  banking  has  been  devised  with 
a  wisdom  that  reflects  the  highest  credit  upon  its  author, 
to  furnish  the  people  of  the  United  States  a  national  bank 
note  circulation  without  the  agency  of  a  national  bank. 
It  is  not  to  be  a  mammoth  corporation  with  power  to  in- 
crease and  diminish  its  discounts  and  circulation,  at  the  will 
of  its  managers,  thus  enabling  a  board  of  directors  to  con- 
trol the  business  and  politics  of  the  country.  It  can  have 
no  concentrated  political  power.  Nor  do  I  see  how  it  can 
be  diverted  from  its  proper  and  legitimate  objects  for 
partisan  purposes.  It  will  concentrate  in  the  hands  of  no 
privileged  persons  a  monopoly  of  banking.  It  simply 
authorizes,  under  suitable  and  necessary  restrictions  a  num- 
ber of  persons,  not  less  than  five,  in  any  of  the  states  or 
territories  of  the  Union,  to  engage  in  the  business  of  bank- 
ing, while  it  prevents  them  from  issuing  a  single  dollar  to 
circulate  as  money  which  is  not  secured  by  the  stocks  and 
resources  of  the  government.  It  is,  therefore,  in  my  judg- 
ment, (as  far  as  calculation  is  regarded,)  not  only  a  per- 
fectly safe  system  of  banking,  but  it  is  one  that  is  eminently 
adapted  to  the  nature  of  our  political  institutions. 

In  referring  to  his  conference  with  Secretary  Chase,  at  the 
time  he  was  tendered  and  accepted  the  appointment  of  Comp- 
troller, McCulloch  states  that  when  the  interview  was  about  to 
terminate  he  said  to  the  Secretary  that  he  had  but  one  request  to 
make,  and  that  was  that  as  he  would  be  responsible  for  the  proper 
organization  and  management  of  the  bureau,  which  was  likely  to 
become  a  very  important  one,  he  desired  to  have  the  selection  of 
his  clerks.  To  this  request,  he  quotes  Secretary  Chase  as  saying : 
"Manage  the  bureau  in  your  own  way.  When  you  need  clerks, 
and  as  you  need  them,  send  their  names  to  me  and  they  will  be 
appointed."  This  understanding,  McCulloch  said,  was  fully  car- 
ried out,  and  that  in  no  instance  while  he  was  Comptroller  was 
an  appointment  made  for  the  bureau  which  was  not  on  his 
recommendation. 


ROMANCE  AND  TRAGEDY  OF  BANKING  25 

While  this  rule  has  been  adhered  to  generally  since  Mr.  Mc- 
Culloch's  time,  there  have  been  some  notable  exceptions  and  irri- 
tating consequences  resulting  from  interferences  by  subordinate 
officials  of  the  Secretary's  office  with  the  personnel  and  manage- 
ment of  the  bureau,  more  or  less  frequent  and  successful  accord- 
ing to  the  flexibility  or  rigidity  of  the  vertebrae  of  the  occupant 
of  the  Comptroller's  chair,  for  the  time  being,  and  the  degree  of 
his  insistence,  not  only  upon  an  observance  of  the  rule  established 
by  McCulloch,  but  of  the  provision  of  the  national  banking  laws 
which  conferred  upon  the  Comptroller  the  authority  to  "employ 
from  time  to  time  the  necessary  clerks,  to  be  appointed  and  classi- 
fied by  the  Secretary  of  the  Treasury,  to  discharge  such  duties 
as  the  Comptroller  shall  direct."  This  right  and  privilege  was 
recognized  by  every  Secretary  of  the  Treasury  since  the  Cur- 
rency Bureau  was  established  whenever  the  Comptroller  insisted 
upon  the  exercise  of  his  prerogative  by  appealing  to  him  against 
the  arbitrary  interference  of  some  subordinate  official  of  his  office. 

While  some  very  able  and  experienced  men  have  occupied  the 
position  of  Assistant  Secretary  of  the  Treasury,  there  was  a  time 
for  awhile  when  these  positions  became  an  exceedingly  attractive 
school  of  finance  from  which  a  number  of  very  bright  and  excep- 
tionally capable  young  men,  with  no  previous  experience  in  bank- 
ing or  finance,  were  graduated  in  remarkably  short  periods  as 
expert  financiers  and  bankers,  with  the  honorary  degree  of  "Ex" 
as  indicating  their  principal  specialty  and  main  reliance  for  rec- 
ognition in  the  busy  financial  and  commercial  world. 

When  these  young  men  first  entered  the  service  of  the  Depart- 
ment, they  became  thoroughly  imbued  with  the  idea  that  every- 
thing in  connection  with  the  Department's  business  methods 
needed  reforming,  and  they  immediately  set  to  work  to  suggest  or 
inaugurate  changes  of  various  kinds  which,  while  invariably  in- 
volving the  Government  in  considerable  unnecessary  expense  and 
generally  disturbing  the  public  business,  contributed  nothing 
toward  improvement  in  methods  or  economy  in  public  expendi- 
tures, but  in  some  instances  amounted  to  pure  vandalism  in  the 
destruction  of  public  property,  wastefulness  of  public  funds,  and 
demoralization  of  the  service  generally. 


26  ROMANCE  AND  TRAGEDY  OF  BANKING 

McCulloch's  Annual  Reports 

During  the  twenty-two  months  of  McCulloch's  incumbency  of 
the  office  of  Comptroller  of  the  Currency,  he  made  two  annual 
reports  to  Congress.  The  first  report  was  devoted  almost  entirely 
to  a  review  in  detail  of  the  National  Bank  Act  passed  in  1863. 
He  pointed  out  its  numerous  defects,  recommended  the  repeal  of 
a  number  of  its  provisions,  the  amendment  of  others,  and  the  en- 
actment of  additional  legislation  to  supply  omissions  which  the 
practical  operation  and  administration  of  the  law  had  shown  to 
be  necessary.  These  suggestions  were  largely  adopted  in  the  1864 
revision  of  the  act. 

The  second  report  of  Mr.  McCulloch  was  devoted  principally 
to  a  discussion  of  the  paper  issues  of  the  Government,  and  the 
note-issuing  function  of  the  national  banks. 

While  defending  the  course  of  the  Government  in  resorting  to 
the  issue  of  United  States  notes,  endowed  with  lawful  money  quali- 
ties, as  a  great  public  necessity  at  that  time,  he  expressed  the  view 
that  when  the  Civil  War  ended  and  the  necessities  which  led  to  the 
issue  of  this  form  of  money  had  ceased  to  exist,  these  notes  should 
be  promptly  retired. 

His  objections  to  such  Government  issues  were  stated  with 
great  clearness  and  force.  Paper  money,  he  said,  had  been  found 
to  be  useful  and  an  absolute  necessity  in  all  commercial  countries 
in  the  transaction  of  business,  and  as  a  substitute  for  coin,  but 
that  all  such  money  should  be  convertible  into  coin.  Its  issue 
should  be  regulated  by,  and  should  not  exceed  in  volume  the  legiti- 
mate demands  of  healthy  trade. 

While  admitting  the  imperfections  of  the  circulation  furnished 
by  the  national  banks,  he  contended  that  all  of  the  objections  that 
were  raised  to  banknote  circulation  applied  with  equal,  if  not 
greater,  force  to  Government  note  issues,  as  the  volume  of  the 
former  is  restricted  by  law,  and  is  liable  for  redemption,  while 
the  latter  is  regulated  only  by  the  necessities  of  the  Government 
or  the  interests  of  the  political  party  in  power,  having  no  relation 
to  the  needs  of  trade  and  commerce. 

He  contended  that  no  kind  of  paper  money  is  without  its 
objections.  While  its  use  may  be  and  is  a  commercial  necessity, 


ROMANCE  AND  TRAGEDY  OF  BANKING  27 

no  form  of  paper  currency  that  has  yet  been  contrived  is  as  unob- 
jectionable as  national  bank  circulation. 

Mr.  McCulloch  expressed  his  regret  that  so  many  national 
banks  were  being  organized  in  states  in  which  before  the  passage 
of  the  National  Bank  Act  there  was  no  deficiency  in  banking 
facilities. 

The  purpose  of  the  National  Bank  Act,  he  said,  was  not  to 
destroy  State  banks,  but  to  absorb  them,  and  he  expressed  the 
hope  that  other  states  would  follow  the  example  of  Massachu- 
setts, Connecticut  and  Pennsylvania  and  adopt  laws  granting 
authority  to  State  banks  to  convert  into  national  associations, 
without  any  disturbance  or  discontinuance  of  their  business. 

It  appears  from  this  that  Mr.  McCulloch,  like  many  others  at 
that  time,  was  under  the  impression  that  although  the  National 
Bank  Act  authorized  the  conversion  of  State  banks  issuing  circu- 
lation into  national  associations,  without  the  formality  of  liqui- 
dation and  reorganization,  the  authority  of  the  state  was  also 
necessary.  While  in  many  instances  this  contention  was  not 
maintained  by  state  authorities  and  no  objection  was  interposed 
to  such  conversions,  the  question  does  not  seem  to  have  been  judi- 
cially determined  until  1876,  when,  in  the  case  of  Casey  v.  Galli, 
94  U.  S.,  673,  the  Supreme  Court  of  the  United  States  held  that 
"No  authority  other  than  that  conferred  by  Act  of  Congress  is 
necessary  to  enable  a  State  bank  to  become  a  national  banking 
association." 

In  April,  1867,  an  act  was  passed  by  the  Legislature  of  the 
State  of  New  York  authorizing  any  national  bank  in  the  state 
to  become  a  state  banking  institution  by  conversion  and  by  virtue 
of  such  conversion  be  absolved  from  all  allegiance  to  the  Federal 
authorities  and  responsibility  as  a  national  bank. 

The  question  of  the  power  of  a  national  bank  to  convert  into 
a  state  institution  under  authority  of  this  act  was  referred  to  the 
Attorney  General  of  the  United  States,  who,  in  an  opinion  ren- 
dered May  19,  1869,  held  that  it  is  not  within  the  power  of  the 
Legislature  of  a  state  to  alter,  modify,  add  to,  or  diminish  the 
powers,  duties  or  liabilities  created  or  conferred  upon  a  banking 
association  established  under  an  Act  of  Congress.  National 
banks,  he  said,  are  distinct  bodies  corporate,  deriving  their  exist- 


28  ROMANCE  AND  TRAGEDY  OF  BANKING 

ence  from  the  United  States,  and  they  cannot  be  merged  or  in 
any  manner  identified  with  a  state  institution  without  authority 
of  Congress,  except  by  liquidating  and  winding  up  their  affairs 
and  incorporating  anew  under  the  state  laws. 

A  State  bank  may  under  authority  of  a  provision  in  the  Na- 
tional Bank  Act  convert  into  a  national  association,  but  a 
national  association  cannot  convert  into  a  State  bank. 

Mr.  McCulloch  recommended  an  enactment  fixing  a  uniform 
rate  of  interest  for  national  banks,  and  a  tax  on  State  bank  cir- 
culation, at  such  a  rate  as  would  make  it  unprofitable  for  such 
banks  to  issue  circulation,  and  thereby  contribute  toward  making 
national  bank  circulation  what  the  bank  act  intended  it  should 
be — a  uniform  currency  for  the  whole  country. 

In  concluding  his  report  for  1864,  Mr.  McCulloch  suggested 
the  removal  of  the  Currency  Bureau  from  Washington  to  Phila- 
delphia or  New  York.  He  stated  that  it  was  of  the  greatest  im- 
portance that  the  national  currency  system  should  be  independent 
of  politics  and  freed  from  political  influences.  He  expressed  the 
opinion  that  the  bureau  should  be  an  independent  department  of 
the  Government,  and  he  believed  that  this  could  best  be  accom- 
plished by  separating  it  entirely  from  the  Treasury  Department, 
and  locating  it  in  one  of  the  principal  financial  centers  of  the 
country. 

It  is  exceedingly  doubtful,  however,  in  the  light  of  later  events, 
whether  the  bureau  would  have  been  as  free  from  political  and 
financial  influences,  or  at  least  from  the  suspicion  of  such  influ- 
ences, if  this  suggestion  of  Mr.  McCulloch  had  been  adopted,  as 
it  has  been  by  remaining  a  bureau  of  the  Treasury  Department, 
located  in  Washington,  and  operating  in  harmony  with  that  de- 
partment, especially  if  the  point  of  location  had  been  New  York 
City,  with  the  environment  of  Wall  Street. 

The  only  conceivable  advantage  to  be  derived  from  a  change 
of  location  of  the  Currency  Bureau  from  Washington  to  New 
York  was  the  increased  facilities  that  might  be  afforded  for  the 
redemption  of  circulation.  As  about  fifty  per  cent,  of  the  national 
bank  notes  sent  to  Washington  for  redemption  come  from  New 
York  City,  the  expense  and  delay  of  transportation  back  and 
forth  would  be  avoided.  But  at  the  time  Mr.  McCulloch  made 


29 

this  suggestion  a  change  of  location  of  the  bureau  did  not  have 
even  this  consideration  to  commend  it,  as  New  York  City  was 
then  a  redemption  city. 

McCulloch's  Circular  Letter  to  the  Banks 

One  of  the  most  notable  documents  ever  issued  from  the  Comp- 
troller's office  was  a  circular  letter  addressed  by  McCulloch,  in 
1864,  to  the  managers  of  national  banks.  This  circular  contains 
so  many  excellent  suggestions  and  is  so  replete  with  wholesome 
advice  in  regard  to  sound  banking  methods  and  management  that 
it  can  be  very  profitably  read  and  closely  followed  by  many 
bankers  of  the  present  day,  as  a  safe  guide  in  the  conduct  of  their 
banking  business. 

The  following  are  some  of  the  salient  features  of  this  circular : 

The  business  of  a  bank  should  be  carefully  and  promptly 
conducted.  The  books  at  the  close  of  each  day  should  exhibit 
the  amount  of  cash  on  hand,  and  the  exact  condition  of  the 
bank.  In  large  banks  all  the  books  should  be  balanced 
daily.  In  small  banks,  weekly,  or  oftener;  and  as  often  as 
every  quarter  a  careful  examination  of  its  affairs  should 
be  made  by  committees  of  the  directors  appointed  for  this 
purpose,  and  a  report  of  the  result  of  these  examinations 
entered  upon  the  minutes. 

The  officers  of  the  bank,  other  than  the  president,  should 
be  appointed  to  hold  their  office  during  the  pleasure  of  the 
hoard,  and  bonds  should  be  executed  accordingly.  This  will 
obviate  the  necessity  of  requiring  annual  bonds  from  these 
officers,  and  will  prevent  the  occurrence  of  a  time  when  they 
will  not  be  under  bond.  Presidents  being  annually  elected 
or  appointed  will,  of  course,  be  required  to  give  annual 
Ixjnds,  and  whenever  an  official  is  reappointed  a  bond  should 
he  required  of  him. 

No  loans  should  be  made  that  are  not  secured  beyond  a 
reasonable  contingency.  Nothing  should  be  done  to  foster 
and  encourage  speculation.  Facilities  should  be  given  only  to 
legitimate  and  prudent  transactions.  Discounts  should  be 
made  on  as  short  time  as  the  business  of  the  customer  will 
permit,  and  payment  of  all  paper  at  maturity  should  be 


30  ROMANCE  AND  TRAGEDY  OF  BANKING 

insisted  upon,  no  matter  whether  the  bank  needs  the  money 
or  not.  A  note  or  a  bill  should  never  be  renewed  merely 
because  the  bank  may  not  know  where  to  place  the  money 
with  equal  advantage  if  the  paper  is  paid.  In  no  other  way 
can  the  bank  properly  control  the  discount  line,  or  make  it 
at  all  times  reliable. 

Distribute  the  loans  rather  than  concentrate  them  in  a 
few  hands.  Large  loans  to  a  single  individual  or  firm, 
although  sometimes  proper  and  necessary,  are  generally  in- 
judicious and  frequently  unsafe.  Large  borrowers  are  apt 
to  control  the  bank,  and  when  this  is  the  relation  between 
a  bank  and  its  customers,  it  is  not  difficult  to  decide  which 
in  the  end  will  suffer.  Every  dollar  that  a  bank  loans  above 
its  capital  and  surplus  it  owes  for,  and  its  managers  are 
therefore  under  the  strongest  obligations  to  its  creditors, 
as  well  as  to  its  stockholders,  to  keep  its  discounts  constantly 
under  its  control. 

A  bank  should  treat  its  customers  liberally,  bearing  in 
mind  that  it  prospers  as  its  customers  prosper,  but  the 
customers  should  never  be  permitted  to  dictate  its  policy. 

If  the  propriety  of  discounting  an  offering  is  doubted, 
give  the  bank  the  benefit  of  the  doubt  and  decline  it.  If 
the  bank  has  any  reason  to  distrust  the  integrity  of  a 
customer,  close  his  account.  Never  deal  with  a  rascal  under 
the  impression  that  you  can  prevent  him  from  cheating  you. 
The  risk  in  such  cases  is  greater  than  the  profits. 

In  business,  know  no  man's  politics.  Manage  the  bank 
as  a  business  institution,  and  let  no  political  partiality  or 
prejudice  influence  your  judgment  or  action  in  the  conduct 
of  its  affairs. 

Pay  the  officers  such  salaries  as  will  enable  them  to  live 
comfortably  and  respectably  without  stealing,  and  require  of 
them  entire  services.  If  an  officer  lives  beyond  his  means, 
dismiss  him,  even  if  his  excess  of  expenditures  can  be 
explained  consistently  with  his  integrity,  still  dismiss  him. 
A  man  cannot  be  a  safe  officer  of  a  bank  who  spends  more 
than  he  earns. 

The  capital  of  a  bank  should  be  a  reality,  not  a  fiction, 
and  it  should  be  owned  by  those  who  have  money  to  lend, 
and  not  by  borrowers. 

Every  banker  under  the  national  system  should  feel  that 


ROMANCE  AND  TRAGEDY  OF  BANKING  31 

the  reputation  of  the  system,  in  a  measure,  depends  upon  the 
manner  in  which  his  particular  institution  is  conducted,  and 
that,  as  far  as  his  influence  and  his  management  extend,  he 
is  responsible  for  its  success.  It  should  be  the  chief  aim, 
therefore,  of  the  managers  of  the  banks,  to  make  their 
respective  institutions  strong,  not  only  to  keep  their  capital 
from  being  impaired,  but  gradually  to  create  a  surplus  that 
will  be  a  protection  to  their  capital  and  to  their  creditors 
in  the  trying  times  that  will  sooner  or  later  happen  to  all 
banking  institutions.  There  are  few  items  that  will  have 
a  better  look  upon  the  balance  sheet,  and  none  that  is  better 
calculated  to  give  aid  and  comfort  to  the  managers  of  a 
bank,  and  to  secure  for  it  the  confidence  of  the  people, 
than  a  large  surplus  fund.  Create,  then,  a  good  surplus, 
if  even  for  a  short  time  the  stockholders  have  to  be  kept  on 
short  commons  in  the  way  of  dividends  to  do  it. 

Pursue  a  straightforward,  upright,  legitimate  banking 
business.  Never  be  tempted  by  the  prospect  of  large  re- 
turns to  do  anything  but  what  may  be  properly  done  under 
the  National  Currency  Act.  "Splendid  financiering"  is  not 
legitimate  banking,  and  "splendid  financiers"  in  banking  are 
generally  humbugs  or  rascals. 

If  the  rules  laid  down  by  McCulloch  in  this  circular  were 
strictly  followed  by  bank  managers,  bank  failures  would  be  few 
and  far  between  and  losses  to  depositors  and  stockholders  would 
be  reduced  to  a  minimum. 


Appointment  as  Secretary  of  the  Treasury 

Mr.  McCulloch  resigned  the  position  of  Comptroller  March  8, 
1865,  to  accept  appointment  as  Secretary  of  the  Treasury,  and 
served  in  the  latter  capacity  until  March,  1869.  He  was  again 
appointed  Secretary  in  October,  1884,  by  President  Arthur,  to 
fill  the  unexpired  term  of  Secretary  Gresham,  who  resigned  to 
become  a  Circuit  Court  Judge  of  the  United  States. 

In  referring  to  his  second  appointment  as  Secretary  of  the 
Treasury,  Mr.  McCulloch,  in  his  "Men  and  Measures  of  Half  a 
Century,"  took  occasion  to  express  himself  in  the  following  com- 
plimentary terms  of  the  personnel  of  the  Department,  and  his 


32  ROMANCE  AND  TRAGEDY  OF  BANKING 

appreciation  of  the  valuable  services  rendered  the  Government 
and  himself  by  his  official  subordinates  during  his  connection  with 
the  Department : 

I  was  glad  to  see  among  officers  and  clerks  who  called 
at  my  offices  on  the  morning  that  I  entered  upon  the  dis- 
charge of  my  duties  as  Secretary,  a  number  of  familiar 
faces,  although  nearly  fifteen  years  had  passed  since  I  had 
left  the  Department.  I  shall  alwaj^s  hold  in  kind  and  grate- 
ful remembrance  the  men  who  served  with  me  while  I  was 
Comptroller  of  the  Currency  and  Secretary  of  the  Treasury,  in 
a  very  interesting  and  trying  period  of  our  financial  history. 
An  immense  amount  of  work  was  done  in  that  Department 
during  the  civil  war  and  for  some  years  after,  and  although 
it  was  done  by  men  who  had  to  learn  as  they  worked,  the 
record  shows  that  it  was  fairly  well  done.  Faithfully  served 
as  the  Government  was  in  the  field,  it  was  no  less  faithfully 
served  by  the  officers  and  clerks  in  the  public  offices  in 
Washington.  There  were  among  them  men  holding 
subordinate  positions  who  were  competent  to  fill  the  highest; 
men  whose  services  could  not  be  dispensed  with  without 
detriment  to  the  Government;  such  men  as  would  in  Great 
Britain  be  retired  with  a  pension  when  they  were  no  longer 
able  to  perform  their  necessary  work,  instead  of  being 
turned  out,  as  many  have  been,  to  give  place  to  hungry 
applicants. 

Thoroughly  familiar  with  the  details  of  the  business  of  the 
Department  himself,  a  most  industrious  worker,  McCulloch  read- 
ily recognized  and  appreciated  ability,  loyalty  and  industry  in 
others,  and  unselfishly  accorded  credit  where  credit  was  due. 

Selection  of  McCulloch  to  Organize  the  Bureau 

The  selection  of  Mr.  McCulloch  as  the  first  Comptroller  of 
the  Currency  to  organize  the  Bureau  and  start  the  machinery  of 
the  national  banking  system  in  operation  was  a  most  fortunate 
one,  as  no  man  of  that  time  was  better  equipped  to  undertake  so 
difficult  a  task.  He  cherished  to  the  end  of  his  life  an  exalted 
opinion  of  the  dignity  and  importance  of  the  Comptroller's  office, 


ROMANCE  AND  TRAGEDY  OF  BANKING  33 

and  regarded  his  work  in  the  Currency  Bureau  and  the  launching 
of  the  national  banking  system  as  his  greatest  achievement.  He 
was  a  familiar  figure  around  the  Comptroller's  office  for  years 
after  his  retirement  from  public  life,  and  those  who  served  under 
him  always  entertained  for  him  the  greatest  admiration  and 
esteem.  He  never  ceased  to  take  a  deep  interest  in  the  welfare  of 
the  Bureau  and  the  improvement  and  success  of  the  national 
banking  system,  and  no  one  realized  or  appreciated  more  than  he 
the  responsibilities  of  the  Comptroller. 

On  one  occasion,  during  a  temporary  vacancy  in  the  Comp- 
trollership,  he  strolled  into  the  office,  as  he  was  in  the  habit  of 
doing  every  now  and  then,  for  the  purpose  of  paying  his  respects 
to  the  Comptroller  and  seeing  some  of  his  old  friends.  On  this 
occasion  the  Deputy  Comptroller  was  in  charge  of  the  Bureau. 
Introducing  himself,  McCulloch  said  to  the  Deputy,  "Well,  young 
man,  you  have  a  very  responsible  position."  "Oh,  I  don't  know," 
the  young  Deputy  replied,  "I  don't  see  anything  in  the  job  that  a 
man  of  ordinary  intelligence  could  not  learn  in  a  few  days."  This 
inconsiderate  remark  of  the  Deputy  did  not  please  McCulloch, 
and  was  so  repugnant  to  his  conception  of  the  importance  and 
responsibilities  of  the  position  that  he  was  taken  completely 
aback,  and  politely  wishing  the  Deputy  a  good  morning,  left  the 
room  without  another  word,  and  thus  ended  the  interview. 

Mr.  McCulloch  was  a  sturdy  character,  a  practical  and  ex- 
perienced banker  and  financier;  broad-minded  and  conservative 
in  all  things,  but  positive  and  tenacious  in  his  views,  especially  on 
banking  and  finance;  a  close  student  of  the  problems  of  govern- 
ment and  of  all  public  questions  that  affected  the  welfare  of  the 
nation. 

The  closing  chapter  of  his  "Men  and  Measures  of  a  Half  Cen- 
tury," written  many  years  ago,  contains  views  that  are  well  worth 
reading  by  all  thoughtful  men  in  their  application  to  the  condi- 
tions which  prevail  at  the  present  time.  He  devoted  considerable 
thought  to  the  subject  of  unrestricted  suffrage,  the  laxity  of  our 
laws  relating  to  the  elective  franchise;  the  steadily  increasing 
hostility  between  the  poorer  classes  and  the  rich  and  between  cap- 
ital and  labor;  the  growing  concentration  of  wealth  in  the  hands 
of  a  few  whose  gains  have  not  been  wholly  the  result  of  legitimate 


34  ROMANCE  AND  TRAGEDY  OP  BANKING 

business,  but  through  monopolies  and   combinations   of  various 
kinds,  which  were  then  fast  becoming  the  controlling  power. 

Mr.  McCulloch  retired  from  active  public  life  in  March,  1885, 
at  the  close  of  President  Arthur's  administration,  and  died  at  his 
country  home  near  Washington,  D.  C.,  where  he  passed  a  large 
part  of  the  last  years  of  his  life,  May  24,  1895,  at  the  ripe  age 
of  nearly  eighty-seven  years. 


FREEMAN  CLARKE 
Comptroller  of  the  Currency,  1865-1866 


CHAPTER  IV 

Freeman  Clarke 

FREEMAN  CLARKE,  of  New  York,  the  second  Comptroller 
of    the    Currency,    was    appointed    by    President    Lincoln, 
March  21,  1865,  to  succeed  Mr.  McCulloch,  but  resigned 
July  24,  1866,  having  retained  the  office  only  sixteen  months. 

Mr.  Clarke  was  born  at  Troy,  N.  Y.,  March  22,  1809,  and 
was  sixty-five  years  of  age  at  the  time  of  his  appointment  as 
Comptroller.  He  engaged  in  mercantile  pursuits  for  awhile  and 
subsequently  turned  his  attention  to  banking.  In  1837  he  was 
elected  cashier  of  the  Bank  of  Orleans  at  Albion,  N.  Y.  In  1845 
he  removed  from  Albion  to  Rochester  and  became  president  of 
the  Rochester  Bank,  treasurer  of  the  Monroe  County  Savings 
Bank,  and  subsequently  president  of  the  Monroe  County  Bank. 
He  also  held  the  office  of  treasurer  and  director  of  the  Rochester, 
Lockport  and  Niagara  Falls  Railroad  Company,  president  and 
treasurer  of  the  Rochester  and  Genesee  Valley  Railroad  Com- 
pany, director  of  the  Mobile  and  Ohio  Railroad  Company,  treas- 
urer and  director  of  the  House  Telegraph  Company,  and  a  direc- 
tor of  the  Western  Union  Telegraph  Company.  He  was  one  of 
the  first  directors  of  the  Fourth  National  Bank  of  New  York 
City,  and  also  a  trustee  and  subsequently  vice-president  of  the 
Union  Trust  Company  of  New  York.  He  was  vice-president  of 
the  Whig  State  Convention  in  1850.  In  1852  he  was  a  delegate 
to  the  Whig  National  Convention,  and  was  vice-president  of  the 
First  Republican  Convention  in  New  York  State  in  1854.  He 
was  a  Presidential  elector  in  1856,  and  in  1862  was  elected  a  rep- 
resentative from  New  York  to  the  Thirty-eighth  Congress,  serv- 
ing on  the  Committees  on  Manufactures  and  Invalid  Pensions. 
In  1867,  after  leaving  the  Comptroller's  office,  he  was  elected  to 
the  New  York  State  Constitutional  Convention.  In  1870  he  was 
again  elected  a  representative  from  New  York  to  the  Forty- 
second  Congress,  in  which  he  served  on  the  Committee  on  Appro- 


36  ROMANCE  AND  TRAGEDY  OF  BANKING 

priations,  was  re-elected  in  1872  to  the  Forty-third  Congress,  and 
was  a  member  of  the  Committee  on  Foreign  Affairs. 

He  died  at  Rochester,  N.  Y.,  June  24,  1887. 

There  is  very  little  to  be  said  of  Mr.  Clarke's  administration 
as  Comptroller  of  the  Currency,  as  he  remained  in  office  a  very 
short  time,  and  nothing  occurred  during  his  brief  term  of  any 
particular  moment,  except  the  steady  growth  and  development 
of  the  national  banking  system.  During  his  term,  over  two  hun- 
dred and  eighty-three  new  banks  were  added  to  the  system  and 
seven  hundred  and  thirty-one  State  banks  were  converted  into 
national  associations. 

The  first  failure  of  a  national  bank  occurred  during  Mr. 
Clarke's  administration.  This  was  the  First  National  Bank  of 
Attica,  N.  Y.,  for  which  a  receiver  was  appointed  April  14,  1865, 
the  date  of  the  assassination  of  President  Lincoln,  although  the 
death  of  the  President  had  no  bearing  whatever  upon  the  closing 
of  the  bank.  The  failure  was  due  to  injudicious  banking  and  in- 
solvency of  large  debtors.  This  was  a  small  bank,  with  capital 
of  $50,000,  and  total  assets  of  only  $208,106. 

It  is  evident  from  this  failure  that  the  good  advice  which  Mr. 
McCulloch  gave  in  his  circular  letter  of  instructions  to  bank  man- 
agers, hereinbefore  quoted,  to  "distribute  the  loans  rather  than 
concentrate  them  in  a  few  hands,"  was  not  heeded  by  the  man- 
agers of  this  institution,  and  disaster  was  the  consequence. 

Unfortunately,  the  same  may  be  truthfully  said  of  many  other 
banks  in  the  long  line  of  failures  that  have  occurred  since  the  in- 
auguration of  the  national  system.  The  loans  of  a  bank  should 
be  diversified  as  fully  as  possible  and  not  concentrated,  as  is  so 
often  the  case,  in  a  few  or  affiliated  interests,  to  such  an  impru- 
dent extent  that  the  failure  of  one  individual  or  interest  may  seri- 
ously impair  the  surplus  of  the  bank,  or  threaten  the  institution 
with  an  impairment  of  its  capital,  if  not  insolvency. 

It  has  been  repeatedly  asserted  that  no  national  bank  ever 
failed  whose  managers  conducted  its  business  within  the  pro- 
visions and  limitations  of  the  national  banking  laws.  While  this 
statement  is  true  so  far  as  violations  of  law  by  the  managers  of 
banks  that  have  failed  is  concerned,  it  is  not,  however,  impossible 
for  a  bank  to  fail  whose  affairs  have  been  conducted  entirely 


ROMANCE  AND  TRAGEDY  OF  BANKING  37 

within  the  limitations  of  the  statute.  Failures  may  occur,  with- 
out the  law  having  been  violated,  through  injudicious  banking 
within  the  restrictions  of  law,  but  beyond  the  limitations  of  pru- 
dence and  safety,  as  will  be  shown  further  on  in  this  volume. 

Clarke's  Annual  Report  to  Congress 

The  principal  topics  discussed  by  Mr.  Clarke  in  his  first  and 
only  report  as  Comptroller  of  the  Currency,  were  the  evils  result- 
ing from  a  redundant  and  irredeemable  currency  and  an  adjust- 
ment of  the  tariff  so  as  to  prevent  a  drain  upon  the  gold  resources 
of  the  country  by  an  excess  of  imports  over  exports. 

A  discussion  of  the  tariff,  while  seemingly  out  of  place  in  a 
report  of  the  Comptroller  of  the  Currency,  had  a  direct  bearing 
in  this  instance  upon  the  subject  under  consideration  by  Mr. 
Clarke — the  resumption  of  specie  payments. 

The  unwritten  history  of  the  Comptroller's  office  is  authority 
for  the  statement  that  the  Comptroller  and  the  Secretary  of  the 
Treasury  were  not  in  harmony  in  their  views  on  the  tariff  ques- 
tion, and  that  the  relations  between  the  Comptroller  and  his  dep- 
uty were  also  strained,  which  made  the  position  of  the  former 
decidedly  unpleasant  and  led  to  his  early  resignation  and  retire- 
ment from  the  service,  and  the  appointment  of  the  Deputy  Comp- 
troller, Hiland  R.  Hulburd,  his  successor. 

Bank  Failures  During  Mr.  Clarke's  Administration 

There  were  two  other  national  bank  failures  during  Mr. 
Clarke's  administration,  the  Venango  National  Bank  of  Franklin, 
Pa.,  and  the  Merchants  National  Bank  of  Washington,  D.  C. 
The  former  was  placed  in  the  hands  of  a  receiver  May  1,  1866, 
and  the  latter  May  8,  1866.  The  capital  stock  of  these  banks 
was  $300,000  and  $200,000  respectively. 

On  the  date  of  failure  of  the  Merchants  National  Bank,  a 
resolution  was  adopted  by  the  House  of  Representatives  direct- 
ing the  Committee  on  Banking  and  Currency  to  make  an  investi- 
gation of  the  cause  of  the  failure  of  these  two  banks,  and  to 
report  to  the  House  the  amount  of  Government  money  deposited 


38  ROMANCE  AND  TRAGEDY  OF  BANKING 

therein,  with  a  recommendation  for  any  additional  legislation 
found  to  be  necessary  to  protect  the  public  and  the  Government 
in  their  dealings  with  national  banks. 

The  report  of  the  Committee  shows  that  the  Merchants  Na- 
tional Bank  was  organized  in  September,  1864,  by  eleven  share- 
holders, all  of  whom  were  resident  business  men  of  Washington, 
except  one,  who  resided  in  Prince  George  County,  Maryland. 
William  Bayne,  a  brother  of  L.  P.  Bayne,  of  the  firm  of  Baync  & 
Company,  of  Baltimore,  was  its  first  president. 

Shortly  after  the  bank  was  chartered,  it  was  designated  a 
public  depositary,  and  security  to  the  amount  of  $100,000  was 
deposited  with  the  United  States  Treasury  for  public  moneys. 
At  the  time  of  the  failure,  the  public  money  on  deposit  in  this 
bank  amounted  to  $765,572.  The  house  of  Bayne  &  Company  of 
Baltimore  was  the  principal  debtor  of  the  bank.  The  liabilities 
of  this  concern  to  the  association  amounted  to  a  sum  nearly  equal 
to  the  public  money  deposit,  for  which  the  bank  held  no  security 
whatever.  The  largest  part  of  the  indebtedness  was  for  seven- 
thirty  United  States  bonds,  which  had  been  transmitted  by  the 
bank  to  this  company.  These  bonds  were  issued  under  authority 
of  the  Act  of  July  17,  1861,  and  bore  interest  at  the  rate  of  seven 
per  cent.  The  amount  of  the  issue  was  $139,999,750.  While 
the  books  of  the  bank  falsely  showed  this  company's  indebtedness 
to  be  only  $283,586,  even  this  large  liability  was  concealed  from 
the  Comptroller  of  the  Currency  by  reporting  it  as  only  $20,900 
and  representing  the  difference  as  bonds  in  bank. 

The  committee  reported  that  the  testimony  taken  proved  the 
management  of  the  bank  to  have  been  in  the  highest  degree  illegal, 
improvident,  reckless  and  dishonest;  that  its  failure  was  caused 
by  extravagant  and  unreasonable  credits  allowed  to  Bayne  & 
Company  without  security,  and  the  failure  of  this  firm  necessar- 
ily involved  the  bank.  Before  the  failure  of  the  bank,  William 
Bayne,  its  first  president,  had  been  succeeded  by  Leonard  Huyck, 
the  former  cashier. 

It  appears  from  the  testimony  that  a  most  pernicious  system 
had  been  adopted  and  followed  by  Huyck  in  connection  with 
Oscar  King,  one  of  the  directors,  and  another  party  named  H.  G. 
Fant,  by  which  they  undertook  to  procure  deposits  of  public 


39 

moneys  by  Government  disbursing  officers,  for  which  the  director 
and  his  associate  received  interest  for  having  influenced  them  to 
open  accounts  with  the  bank.  King  was  the  bondsman  of  a  United 
States  Paymaster,  whose  deposit  he  procured.  A  member  of  the 
firm  of  Bayne  &  Company,  also  a  director,  was  the  other  bonds- 
man. It  was  shown  by  the  testimony  that  King  induced  this  pay- 
master to  make  a  deposit  amounting  to  over  $500,000,  for  the 
purpose  of  assisting  the  bank,  which  was  known  to  be  embar- 
rassed. Of  the  $765,572  of  public  moneys  deposited  in  the  bank 
at  the  time  of  the  failure,  all  but  $7308  was  paymasters'  or  dis- 
bursing officers'  accounts. 

It  appears  from  the  testimony  that  the  officials  making  the 
deposits  had  no  knowledge  of  the  payment,  to  the  director  and 
his  associates,  of  interest  on  their  accounts  and  that  they  derived 
no  benefit  from  the  deposits.  The  payment  of  interest  on  these 
accounts  appears  to  have  been  arranged  by  the  president  of  the 
bank,  without  the  knowledge  or  concurrence  of  the  cashier  or  the 
board  of  directors. 

In  April,  1866,  at  the  time  of  the  impending  failure  of  Bayne 
&  Company,  King  suggested  to  the  cashier  of  the  bank  the  possi- 
bility of  procuring  a  large  deposit  from  Paymaster  Paulding  of 
the  Army.  The  Government  funds  to  the  credit  of  this  officer 
were  then  on  deposit  in  the  First  National  Bank  of  Washington, 
a  designated  public  depositary.  Under  the  regulations  of  the 
Pay  Department  of  the  Army  the  transfer  of  these  funds,  or  any 
part  of  them,  from  one  designated  depositary  to  another  was 
prohibited  without  the  authorization  of  the  Department.  It  was 
then  proposed  to  have  the  officers  of  the  First  National  Bank 
make  the  transfer,  but  neither  the  president  nor  the  cashier  of 
the  bank  would  agree  to  this.  Paymaster  Paulding  already  had 
a  very  large  deposit  in  the  Merchants  National  Bank,  and  with 
a  view  to  saving  this  deposit  by  assisting  the  bank  in  its  emer- 
gency he  requested  the  cashier  of  the  First  National  Bank  to  look 
into  the  condition  of  the  former  institution  and  to  ascertain 
whether  or  not  it  would  be  safe  for  him  to  increase  his  deposit. 

The  cashier  made  inquiry  as  to  the  condition  of  the  Merchants 
National  Bank,  and  learning  that  its  chief  asset  was  the  indebted- 
ness of  Bayne  &  Company,  declined  to  advise  Paymaster  Pauld- 


40  ROMANCE  AND  TRAGEDY  OF  BANKING 

ing  one  way  or  the  other,  leaving  it  to  his  discretion  to  act  upon 
his  own  responsibility,  with  the  understanding,  however,  that  if 
his  checks  were  presented  at  the  First  National  Bank  they  would 
be  honored.  On  the  same  day  the  Paymaster's  checks  were  pre- 
sented by  the  cashier  of  the  Merchants  National  for  two  hundred 
thousand  dollars,  and  were  paid  and  placed  to  the  credit  of 
Bayne  &  Company  through  different  concerns  in  New  York, 
except  such  as  were  paid  in  cash  for  Bayne  &  Company's  benefit. 

It  also  appears  from  the  testimony  that  $50,000  was  secured 
from  Paymaster  Robinson  by  transfer  of  public  moneys  to  his 
credit  in  the  Bank  of  the  Metropolis,  upon  representations  made 
to  him  that  the  Merchants  National  was  embarrassed  and  needed 
assistance.  This  amount  was  apparently  used  by  the  cashier  of 
the  Merchants  National  to  pay  his  individual  debts  to  the  cashier 
of  the  Bank  of  the  Metropolis  and  to  the  bank  itself,  instead  of 
for  the  purpose  of  supplying  the  Merchants  National  with  the 
additional  currency  which  its  officers  represented  it  needed  so 
badly. 

The  day  following  this  $50,000  deposit  Paymaster  Robinson 
became  uneasy  as  to  the  safety  of  the  funds  in  this  bank,  and 
transferred  his  entire  balance,  amounting  to  $51,252,  to  the 
credit  of  the  Treasurer  of  the  United  States. 

It  also  appears  that  the  $200,000  deposited  by  Paymaster 
Paulding  was  remitted  to  Bayne  &  Company,  under  an  agreement 
that  the  large  amount  of  securities  held  by  that  company  would 
be  released  and  returned  to  the  bank,  but  the  only  securities  that 
appear  to  have  been  returned  were  850  shares  of  the  stock  of  the 
Washington,  Georgetown  and  Alexandria  Railroad  Company, 
which  the  cashier  of  the  bank  took  possession  of,  claiming  them 
to  be  his  individual  property.  The  cashier  was  the  treasurer  of 
this  railroad  company.  He  testified  before  the  committee  that 
he,  as  treasurer  of  the  railroad  company,  issued  to  Bayne  & 
Company  2850  shares  of  the  stock  of  the  company,  of  the  par 
value  of  $285,000,  under  a  promise  of  Bayne  &  Company  to 
return  to  him  genuine  certificates  to  replace  this  issue,  but  that 
the  stock  never  was  returned,  consequently  there  was  an  over- 
issue of  the  stock  of  the  railroad  company  to  that  amount. 


ROMANCE  AND  TRAGEDY  OF  BANKING  41 

In  October,  1865,  there  was  a  change  in  the  officers  of  the 
bank.  William  Bayne  resigned  as  president,  and  the  cashier, 
Leonard  Huyck,  was  appointed  to  succeed  him,  and  Charles  A. 
Sherman  was  made  cashier.  In  January,  1866,  C.  W.  Boteler, 
one  of  the  original  organizers  of  the  bank,  was  appointed  vice- 
president.  Mr.  Boteler  testified  that  although  the  By-Laws  of 
the  bank  required  weekly  meetings  of  the  board  of  directors, 
practically  no  meetings  were  held.  Whenever  a  quorum  of  the 
board  happened  to  be  present  on  meeting  days  Mr.  Huyck  would 
inform  them  that  there  was  no  business  for  them  to  transact. 
Although  a  Finance  Committee,  composed  of  the  president,  the 
vice-president  and  the  cashier,  were  authorized  to  transact  all 
the  business  of  the  board,  Mr.  Boteler,  the  vice-president,  finding 
that  he  was  not  consulted  in  regard  to  loans  or  other  important 
business  of  the  bank,  had  a  resolution  passed  by  the  board  pro- 
hibiting any  loans  being  made  except  by  the  unanimous  consent 
of  the  Finance  Committee.  Notwithstanding  this  fact,  it  appears 
that  the  president  of  the  bank  continued  to  act  as  though  the 
bank  were  his  own  and  neither  consulted  Mr.  Boteler  nor  the 
cashier  in  regard  to  his  transactions. 

This  bank  seemed  to  have  started  upon  an  iniquitous  career 
from  the  very  beginning.  The  name  of  J.  B.  Stewart  appears  as 
one  of  the  original  subscribers  for  600  shares,  or  $60,000  of  the 
capital  stock.  Stewart  testified  that  he  never  subscribed  for  any 
shares,  that  he  never  signed  the  organization  certificate,  had  never 
owned  or  transferred  any  stock,  nor  attended  any  meetings  of  the 
stockholders  or  directors,  and  that  he  never  knew  any  of  the  stock 
of  the  bank  stood  in  his  name  until  he  saw  a  published  list  of  the 
stockholders  at  the  time  of  the  failure.  The  notary  public  before 
whom  the  organization  certificate  bearing  Mr.  Stewart's  signa- 
ture was  acknowledged  testified  that  at  the  time  of  the  acknowl- 
edgment of  the  signatures  to  the  certificate  he  looked  around  and 
saw  that  all  of  the  signers  were  present,  except  Mr.  Stewart,  and 
that  he  certified  that  Mr.  Stewart  was  present  because  Mr.  Oscar 
A.  Stevens,  who  signed  Stewart's  name  to  the  paper,  was  present, 
and  as  Stevens  often  attended  to  business  for  Mr.  Stewart  he 
assumed  that  it  was  all  right  and  certified  to  Stewart's  personal 
acknowledgment  of  his  signature. 


42  ROMANCE  AND  TRAGEDY  OF  BANKING 

Stewart  testified  that  when  the  bank  commenced  business  he 
opened  an  account  with  it  and  arranged  to  draw  for  money  as 
he  should  require  it,  depositing  950  shares  of  stock  of  the  Wash- 
ington, Alexandria  and  Georgetown  Railroad  Company  as  secur- 
ity, and  that  he  also  deposited  with  the  bank  for  safe  keeping 
$169,000  of  bonds  of  the  Union  Pacific  Railroad  Company  whicli 
he  held  in  trust.  These  bonds,  Stewart  stated,  he  learned  shortly 
before  the  bank  failed  had  been  sent  by  Huyck,  the  president,  to 
Bayne  &  Company,  and  by  that  firm  hypothecated  for  loans  from 
various  banks  in  Baltimore  without  his  knowledge  or  consent,  and 
when  he  called  at  the  bank  after  the  failure  to  pay  his  loan  secured 
by  the  railroad  stock  he  found  that  this  stock  had  also  been 
abstracted  and  disposed  of  in  the  same  manner  as  the  bonds. 

It  is  plainly  evident  from  this  testimony  and  other  facts 
brought  to  light  by  the  Investigating  Committee  that  this  bank 
from  the  very  outset  was,  as  stated  by  the  committee,  in  the  hands 
of  a  reckless,  unscrupulous  and  dishonest  management. 

The  report  of  the  committee  in  commenting  on  the  indiscrimi- 
nate depositing  of  public  moneys  by  disbursing  officers  in  banks 
of  their  own  selection  severely  censured  Paymaster  Paulding  for 
using  public  funds  to  save  the  Merchants  National  Bank  and 
Bayne  &  Company  from  failure. 

In  regard  to  the  deposits  of  the  other  disbursing  officers,  the 
committee  stated  that  while  it  did  not  appear  that  such  deposits 
were  made  for  an  unlawful  purpose  or  that  the  disbursing  officers 
received  any  benefit  directly  or  indirectly  from  them,  the  only 
reason  for  making  some  of  these  deposits  appeared  to  be  a  desire 
on  the  part  of  these  disbursing  officers  to  gratify  a  vanity  in 
patronizing  the  banks  by  displaying  the  control  they  exercised 
over  the  public  moneys  to  their  credit.  One  of  the  disbursing 
officers  testified  that  the  only  inducement  that  influenced  him  to 
withdraw  money  from  the  Treasury  Department  and  deposit  it 
in  the  Merchants  National  Bank  was  that  he  thought  the  First 
National  Bank  of  Washington  had  more  than  its  share  of  public 
money,  and  wishing  to  see  the  public  funds  more  fairly  distrib- 
uted among  the  national  banks,  he  withdrew  $25,000  from  the 
Treasury  and  deposited  it  in  the  Merchants  National  Bank  only 
a  few  days  before  its  failure. 


ROMANCE  AND  TKAGEDY  OF  BANKING  43 

The  committee,  as  a  result  of  the  conditions  revealed  by  this 
investigation,  reported  a  bill  which  became  a  law,  taking  from 
disbursing  officers  all  control  in  the  selection  of  banks  in  which 
to  keep  the  public  funds  intrusted  to  them.  The  committee  ex- 
pressed the  opinion,  however,  that  the  Treasury  Department  had 
given  a  construction  to  the  law  not  contemplated  by  the  com- 
mittee, which  seemed  to  take  away  much  of  its  efficiency. 

The  report  of  the  committee  concluded  with  a  recommenda- 
tion for  the  adoption  of  a  resolution  submitted  directing  the  Sec- 
retary of  War  to  institute  such  legal  proceedings  as  should  be 
deemed  necessary  for  the  punishment  of  the  managers  of  the 
Merchants  National  Bank,  and  others  who  aided  or  abetted  them 
in  committing  a  breach  of  trust  by  misapplying  the  public  money 
intrusted  to  them  for  safe  keeping,  and  also  such  proceedings  as 
should  be  found  necessary  to  recover  any  portion  of  such  money. 

The  committee  also  sent  a  circular  letter  to  each  and  every 
national  bank  designated  as  a  public  depositary,  requiring  the 
bank  to  prepare  and  forward  to  the  Committee  on  Banking  and 
Currency  a  statement  showing  the  amount  of  money  standing  to 
the  credit  of  the  United  States  or  the  United  States  Treasurer, 
any  disbursing  officer  or  agent  of  the  United  States,  the  name  of 
such  officer  or  agent,  and  the  amount  to  the  credit  of  each  as 
shown  by  the  books  of  the  bank  in  May,  1866. 

An  assessment  of  one  hundred  per  cent,  was  levied  by  the 
Comptroller  upon  the  stockholders  of  the  Merchants  National 
Bank  to  pay  the  debts  of  the  association,  but  only  $16,488  of 
the  $200,000  liability  was  collected.  The  total  collections  by  the 
receiver  from  all  sources  amounted  to  $312,992,  while  the  amount 
of  the  claims  proved  against  the  bank  Avas  $669,513,  on  which 
they  received  dividends  of  only  24.70  per  cent.  The  receivership 
was  finally  closed  May  14,  1883. 

Failure  of  the  Venango  National  Hank 

The  failure  of  the  Venango  National  Bank  of  Franklin,  Pa., 
was  investigated  by  the  same  committee.  This  bank  was  a  desig- 
nated public  depositary.  At  the  time  of  its  failure  the  public 
moneys  on  deposit  amounted  to  about  $291,467,  while  the  securi- 


44  ROMANCE  AND  TRAGEDY  OF  BANKING 

ties  held  by  the  Treasury  Department  to  protect  such  deposits 
amounted  to  only  $50,000. 

This  bank  seemed  to  have  been  operated  in  the  interest  of  Cul- 
ver, Penn  &  Company  of  New  York,  in  the  same  manner  that  the 
Merchants  National  Bank  was  managed  for  the  benefit  of  Bayne 
&  Company  of  Baltimore.  Their  transactions  with  each  other  were 
very  similar  and  the  results  were  the  same.  Bayne  &  Company 
failed  owing  the  Merchants  National  Bank  several  hundred  thou- 
sand dollars.  The  bank  failed  in  consequence.  Culver,  Penn  & 
Company  failed  owing  the  Venango  National  Bank  over  $600,000. 
The  failure  of  the  bank  followed.  Both  banks  wholly  disregarded 
the  law  in  respect  to  the  limit  of  loans.  Bayne  &  Company  hy- 
pothecated or  sold  securities  of  the  Merchants  National  Bank. 
Culver,  Penn  &  Company  did  likewise  with  Government  bonds 
belonging  to  the  Venango  National  Bank,  deposited  with  the  firm 
for  safe  keeping. 

One  hundred  per  cent,  assessment  was  levied  upon  the  stock- 
holders of  this  bank  by  the  Comptroller  to  make  up  the  deficiency 
in  its  assets  to  meet  its  liabilities,  but  only  $1245  was  collected 
from  this  source  out  of  a  total  stock  liability  of  $300,000.  The 
total  claims  proved  amounted  to  $434,531,  but  the  total  collec- 
tion from  all  sources  amounted  to  only  $122,240.  The  dividends 
paid  on  the  proved  claims  aggregated  only  23.37  per  cent.  The 
receivership  was  finally  closed  February  2,  1885. 

In  the  course  of  the  investigation  of  these  two  bank  failures 
it  was  developed  that  many  of  the  State  banks  that  had  converted 
into  national  associations  did  not  make  proper  effort  to  with- 
draw their  old  circulation,  but  in  many  instances  continued  to 
pay  it  out  and  keep  the  old  State  bank  notes  in  circulation, 
thereby  receiving  the  benefit  of  both  their  State  and  National 
bank  circulation.  In  some  instances  such  banks  reported  to  the 
Comptroller  that  the  old  circulation  had  been  withdrawn  when 
it  was  actually  being  paid  out.  Banks  in  Massachusetts,  Rhode 
Island,  New  York  and  New  Jersey  were  reported  as  engaged  in 
this  practice.  Some  banks  were  reported  as  not  engaged  in  a 
legitimate  banking  business  but  were  organized  as  national  asso- 
ciations simply  for  the  benefit  of  the  circulation  privilege.  Such 


ROMANCE  AND  TRAGEDY  OF  BANKING  45 

banks  were  mostly  owned  by  brokers  and  private  bankers  and 
were  operated  in  conjunction  with  their  office  business. 

One  bank  of  this  character  in  Michigan  was  a  designated 
depositary  of  the  United  States,  but  when  it  was  examined  the 
only  account  on  its  books  was  a  credit  of  $17,083  to  the  Treas- 
urer of  the  United  States,  for  which  the  Government  held  $50,000 
of  United  States  bonds  as  security. 

The  committee  expressed  the  opinion  that  the  national  bank- 
ing laws,  as  they  existed  at  that  time,  did  not  confer  the  power 
to  correct  and  prevent  many  of  the  objectionable  practices  and 
abuses  that  the  banks  were  found  to  be  engaged  in,  and  a  bill 
was  therefore  reported  to  give  to  the  Comptroller  of  the  Cur- 
rency the  necessary  authority  to  restrain  banks  which  he  knew 
to  be  improperly  managed. 

The  facts  revealed  by  the  investigation  of  the  causes  which 
led  to  the  failure  of  these  two  banks  and  subsequently  of  other 
national  institutions  demonstrates  that  speculation,  dishonesty 
and  injudicious  management  in  banking  has  not  been  confined  to 
any  particular  period  in  the  life  of  the  national  system,  but  that 
banking  in  the  early  years  developed  traits  of  character  in  indi- 
viduals and  banking  methods  as  unwholesome  and  pernicious  as 
any  that  have  been  discovered  in  later  years. 

Removal  of  the  Currency  Bureau  to  New  York 

No  amendments  to  the  National  Bank  Act  were  passed  dur- 
ing Mr.  Clarke's  administration.  But  he  renewed  the  recom- 
mendation of  his  predecessor,  Mr.  McCulloch,  for  the  separation 
of  the  Currency  Bureau  from  the  Treasury  Department  and  its 
removal  to  New  York  City.  He  expressed  the  opinion  that  both 
the  interests  of  the  Government  and  the  banks  would  be  subserved 
by  such  a  change.  He  claimed  that  the  location  of  the  bureau 
at  the  financial  center  of  the  country  would  not  only  be  a  great 
convenience  to  those  who  were  engaged  in  the  banking  business, 
but  would  be  more  economical  to  the  Government  and  to  the 
banks  in  the  saving  of  express  charges  for  transportation  of 
money,  time,  risk  and  loss  of  interest.  Mr.  Clarke  did  not  urge 
as  one  of  the  reasons  for  a  change  of  location,  as  did  his  prede- 


46  ROMANCE  AND  TRAGEDY  OF  BANKING 

cessor,  that  the  bureau  would  be  freer  from  political  and  finan- 
cial influences  by  its  removal  from  Washington,  and  it  is  not 
believed  that  either  he  or  McCulloch,  if  living  today,  would  enter- 
tain the  same  views  as  to  the  necessities  for  a  change  of  location 
of  the  bureau  or  its  separation  from  the  Treasury  Department 
as  they  expressed  at  the  time  they  made  this  suggestion. 


HILAND  R.  HULBURD 
Comptroller  of  the  Currency,  1867-1872 


CHAPTER  V 

Hiland  R.  Hulburd 

HILAND  R.  HULBURD,  the  third  Comptroller  of  the 
Currency,  was  appointed  February  1,  1867,  and  served 
until  April  3,  1872. 

Mr.  Hulburd  was  born  in  1829,  at  Worthington,  near  Colum- 
bus, Ohio.  His  father  was  a  Presbyterian  clergyman  of  consid- 
erable note.  Mr.  Hulburd  graduated  at  an  early  age  from  the 
Western  Reserve  College  at  Hudson,  Ohio.  He  studied  law  in  the 
office  of  Anthony  Howard  Dunlevy  of  Lebanon,  Ohio,  and  was 
admitted  to  the  bar.  In  1865  he  was  appointed  registrar  of  the 
Banking  Department  of  the  State  of  Ohio.  On  August  1,  1865, 
he  was  appointed  Deputy  Comptroller  of  the  Currency  under 
Hugh  McCulloch,  and  acted  as  Comptroller  during  the  vacancy 
in  that  office  from  July  24,  1866,  to  February  1,  1867,  when  he 
was  appointed  Comptroller. 

After  his  retirement  from  the  Comptrollership  until  the  date 
of  his  death  he  spent  most  of  his  time  in  New  York  City.  Dur- 
ing the  last  years  of  his  life  he  was  connected  with  oil  interests 
in  Pennsylvania  and  had  an  office  in  New  York  City.  He  lost  his 
life  in  the  burning  of  the  steamer  Seawanhaka  on  Long  Island 
Sound,  June  28,  1880. 

Although  the  national  banking  system  was  in  its  infancy  dur- 
ing Mr.  Hulburd's  incumbency  of  the  office  of  Comptroller  his 
annual  reports  to  Congress,  six  in  number,  are  replete  with  inter- 
esting matter  and  compare  favorably  with  the  best  that  have 
emanated  from  the  Currency  Bureau.  Subsequent  experience 
demonstrated  the  soundness  of  his  views  on  banking  questions  and 
practices  and  the  correctness  of  his  conclusions  in  regard  to  the 
subjects  discussed. 

Payment  of  Interest  on  Bank  Balances 

In  his  earlier  reports  Mr.  Hulburd  devoted  a  good  deal  of 
attention  to  the  practice  which  prevailed  to  some  extent  among 

47 


48  ROMANCE  AND  TRAGEDY  OF  BANKING 

the  banks  at  that  time  of  paying  interest  on  bank  balances.  He 
criticised  and  condemned  this  practice  in  severe  terms,  and  quoted 
the  Chancellor  of  the  Exchequer  of  England  as  declaring  in  his 
comments  on  the  causes  which  led  to  the  crisis  of  1857,  as  "one 
eminently  liable  to  abuse,  and  containing  within  it  the  elements 
of  danger." 

Notwithstanding  the  criticisms  of  Mr.  Hulburd,  however, 
this  practice,  which  he  so  strongly  condemned  in  1867,  steadily 
increased  with  the  growth  of  the  national  system  until  it  became 
almost  a  universal  custom  among  the  banks,  the  evil  effects  of 
which,  as  he  predicted,  were  shown  in  some  of  the  panics  of  later 
years. 

The  contention  of  Mr.  Hulburd  was  that  country  banks 
should  keep  deposits  with  city  banks  only  for  the  purpose  of 
facilitating  exchanges  in  carrying  on  their  own  legitimate  busi- 
ness, and  that  the  funds  so  placed  should  not  be  allowed  to  exceed 
the  amount  actually  necessary  for  the  current  demands  of  their 
business.  He  contended  that — 

The  payment  of  high  rates  of  interest  on  bank  balances 
attracts  all  the  spare  capital  from  the  country  to  the 
commercial  centers.  It  is  drawn  away  from  the  country 
where  it  is  needed  to  the  business  centers  where  the  rate 
of  interest  is  higher.  The  cities  then  come  in  competition 
with  the  country  and  compel  borrowers  in  the  country  to 
pay  higher  rates  for  loans. 

He  quoted  M.  Pereire,  the  President  of  the  Credit  Mobilier 
of  France,  as  saying  that  "Banks  are  instituted  only  to  lower  the 
rate  of  interest  and  they  fail  in  their  mission  when  they  do  not 
fulfill  that  character."  Mr.  Hulburd  said : 

The  city  banks  by  the  payment  of  interest 
offer  a  premium  for  deposits,  the  volume  of  which 
should  be  regulated  only  by  the  ebb  and  flow  of  trade.  An 
artificial  stimulant  is  applied,  in  order  to  accumulate  funds 
in  excess  of  the  natural  demand.  So  long  as  the  country 
banks  can  employ  their  means  more  profitably  at  home, 
they  will  do  so,  but  when  their  own  trade  is  dull  they  will 


ROMANCE  AND  TRAGEDY  OF  BANKING  49 

send  their  money  to  the  business  centers.  And  it  so  happens 
that  the  city  banks  will  secure  the  greatest  abundance  of 
means  exactly  at  the  time  when  they  have  the  least  use  for 
them.  But,  as  they  pay  interest  for  such  deposits,  they  must 
be  used.  The  city  banker  becomes  a  broker,  seeking  after 
investments.  He  must  get  more  interest  than  he  pays,  or  he 
will  lose  money.  He  must  loan  it  on  call,  for  it  is  payable 
on  demand,  and  it  always  will  be  demanded  when  he  wants  it 
the  most.  Deposits  are  the  reserve  of  the  country,  and  the 
deposits  of  the  country  banks  at  the  centers  of  trade  are 
their  reserves  for  all  demand  liabilities.  Banks  were  requir- 
ed by  law  to  keep  a  reserve  of  fifteen  per  cent,  of  their 
deposits,  three-fifths  of  which  may  consist  of  balances  due 
from  the  city  banks.  Forbidden  to  use  their  reserve  in  their 
own  business,  they  remit  it  to  New  York,  where  it  is  not 
held  in  reserve,  but  is  loaned  to  stockbrokers  and  speculators. 
Receiving  interest  on  the  amount  under  the  name  of  a 
deposit,  they  really  loan  it  on  call  to  the  city  banks,  which 
in  turn  loan  it  at  a  higher  rate  of  interest. 

A  bank  may  know  the  character  of  its  individual  deposits, 
and  may  be  able  to  judge  with  some  degree  of  accuracy 
of  the  extent  to  which  it  would  be  safe  to  use  them.  But 
of  the  deposits  of  another  bank  and  of  the  causes  that  may 
create  a  demand  by  its  customers,  no  reliable  estimate  can 
be  formed  further  than  that  such  deposits  reach  their  maxi- 
mum at  the  dullest  season  of  the  year,  and  their  minimum 
at  the  season  of  the  greatest  activity  in  business.  Bank 
balances  are  working  balances,  not  surplus  capital  seeking 
investment.  They  ought  not  greatly  to  exceed  the  amount 
necessary  for  the  convenient  transaction  of  business.  The 
city  banks  are  equally  interested  with  the  country  banks  in 
preserving  healthy  and  natural  relations  between  the  centers 
of  trade  and  their  tributaries.  Any  influence  that  interferes 
with  such  relations  cannot  be  beneficial,  and  the  allowance  of 
interest  is  an  unnecessary  interference,  the  termination  of 
which  would  promote  the  interest  of  both  parties  to  the 
arrangement  and  secure  greater  safety  to  the  public  whose 
reserve  funds  are  at  stake  under  the  practice  alluded  to. 

Mr.  Hulburd,  therefore,  was  of  the  opinion  that  the  funds 
required  by  law  at  that  time  to  be  held  in  reserve  by  country 


50  ROMANCE  AND  TRAGEDY  OF  BANKING 

banks  for  the  protection  of  depositors  should  not  be  loaned  to 
the  city  banks  on  interest.  But  the  practice  that  he  complained 
of  in  1867  continued  and  prevailed  to  a  far  greater  extent  in 
later  years.  Country  banks  deposited  their  surplus  funds  with 
city  banks,  not  for  the  purpose  of  facilitating  exchange  in  carry- 
ing on  their  legitimate  business,  but  largely,  if  not  wholly,  for 
the  greater  interest  rates  they  derived  therefrom. 

Operation  of  the  Reserve  Laws 

To  more  clearly  illustrate  the  operation  of  the  old  law  in 
this  respect  let  it  be  assumed  that  a  country  bank  having  net 
deposits  of  $1,000,000  was  required  to  maintain  a  reserve  in 
lawful  money  of  fifteen  per  cent. — $150,000.  Two-fifths  of  this 
amount,  $60,000,  was  required  to  consist  of  cash  in  bank,  and 
the  remaining  three-fifths,  $90,000,  might  consist  of  balances  due 
from  approved  reserve  agents  in  reserve  cities. 

Now  this  country  bank  had  on  hand  $90,000  of  its  own 
notes,  or  the  notes  of  other  national  banks,  which  could  not  be 
counted  as  reserve.  In  order  to  make  these  notes  available  for 
reserve  purposes  the  bank  sent  them  to  its  reserve  agent  and 
received  credit  for  a  like  amount  as  lawful  money  reserve. 

The  reserve  city  bank  from  which  this  credit  was  due  was 
required  to  carry  a  reserve  against  this  deposit  of  twenty-five  per 
cent.,  or  $22,500.  One-half  of  this  amount,  or  $11,250,  might 
consist  of  a  balance  due  from  its  reserve  agent  located  in  a  cen- 
tral reserve  city.  The  bank  could  not  count  any  part  of  the 
$90,000  of  national  bank  notes  received  from  the  country  bank 
as  reserve  so  it  sent  the  entire  amount  to  its  central  reserve  city 
agent,  received  credit  therefor,  and  counted  $11,250  of  such 
credit  as  part  of  the  lawful  money  reserve  required  to  be  held 
against  the  $90,000  deposit  of  the  country  bank. 

The  central  reserve  city  bank  was  required  to  carry  a  reserve 
in  lawful  money  of  twenty-five  per  cent.,  all  of  which  was  required 
to  be  held  in  its  own  vaults.  No  part  of  the  national  bank  notes 
received  from  its  reserve  city  correspondent  could  be  counted  as 
reserve,  so  the  whole  amount  was  shipped  to  Washington  for  re- 
demption and  the  bank  received  in  exchange  therefor  an  equal 
amount  of  legal-tender  notes. 


ROMANCE  AND  TRAGEDY  OF  BANKING  51 

The  $90,000  notes  of  the  country  bank  were  redeemed  and 
charged  by  the  Treasurer  of  the  United  States  to  the  bank's  five 
per  cent,  redemption  fund  and  such  of  the  notes  as  were  fit  for 
use  were  returned  to  the  country  bank  and  new  notes  were  issued 
in  place  of  those  destroyed  as  unfit  for  circulation.  Then  the 
process  above  described  was  renewed  in  an  endless  chain 
operation. 

Now  how  much  lawful  money  reserve  was  actually  held  against 
this  $1,000,000  of  deposits  in  the  country  bank?  As  has  been 
stated,  the  amount  required  by  law  was  $150,000. 

The  country  bank  held  six  per  cent.,  or $60,000 

The  reserve  city  bank  held  twelve  and  one-half 

per  cent.,  or 11,250 

And  the  central  reserve  city  bank  held  twenty- 
five  per  cent.,  or 22,500 


Total    $93,750 

Instead,  therefore,  of  a  reserve  of  $150,000  being  held  against 
the  $1,000,000  of  deposits,  only  $93,750  was  actually  held,  or  a 
fraction  over  nine  per  cent,  instead  of  fifteen  per  cent.,  as  the  law- 
required . 

There  is  still  another  feature  of  this  law  which  was  misleading 
in  its  operation  and  created  a  fiction  in  bookkeeping. 

The  original  $150,000  reserve  required  to  be  carried  by  the 
country  bank  against  the  million  dollars  of  deposits  was  shown 
on  the  books  and  in  the  reports  and  published  statements  of  the 
three  classes  of  banks  at  a  total  of  $180,000,  as  follows : 

The  country  bank  reported : 

Due  from  reserve  agent $90,000 

The  reserve  city  bank  reported: 

Due  to  country  bank $90,000 

Due  from  central  reserve  city  bank  90,000 
The  central  reserve  city  bank  reported : 

Due  to  reserve  citv  bank 90,000 


Total    $180,000  $180,000 


52 

The  payment  of  interest  by  city  banks  on  balances  due  coun- 
try banks  in  excess  of  exchange  requirements  was,  therefore, 
not  the  only  incentive  to  the  concentration  of  bank  deposits  in 
the  city  banks. 

The  reports  of  condition  of  national  banks  for  August  22, 
1907,  the  date  of  the  last  call  previous  to  the  panic  of  1907, 
show  that  on  that  date  the  amount  due  to  banks  and  bankers 
from  national  banks  in  New  York  City  alone  aggregated  over 
$465,000,000  and  in  addition  thereto  over  $145,000,000  was  due 
country  banks,  which  had  been  placed  in  New  York  City  banks  to 
be  loaned  for  account  of  the  former. 

Some  authorities  and  writers  on  banking  and  currency 
strongly  advocated  the  concentration  of  funds  at  the  principal 
financial  center  of  the  country,  and  predicted  that  New  York  City 
would  eventually  become  the  financial  center  of  the  world,  but 
the  panic  of  1907,  and  other  financial  disturbances,  demonstrated 
in  a  very  practical  manner  the  evil  results  of  such  concentration 
under  the  then  existing  system  of  currency. 

No  commercial  bank  should  pay  interest  on  deposits  subject 
to  check  or  withdrawal  on  demand,  either  to  banks  or  individuals, 
but  competition  with  trust  companies  and  other  banking  institu- 
tions operating  under  State  authority  has  forced  national  bank- 
ing institutions  into  many  undertakings  not  authorized  or  con- 
templated by  the  National  Bank  Act  and  foreign  to  the  legitimate 
functions  of  commercial  banks. 

The  payment  of  liberal  and,  in  many  cases,  excessive  rates  of 
interest  by  trust  companies  and  State  banks  has  compelled  many 
competing  national  associations  operating  in  the  same  place  or 
locality  to  offer  like  inducements  for  deposits  and,  in  order  to 
find  profitable  employment  for  such  surplus  funds,  to  make  loans 
or  investments  of  a  more  or  less  hazardous  or  speculative 
character. 

The  policy  of  allowing  interest  on  deposits  subject  to  check 
and  payable  on  demand  is  foreign  to  the  spirit  of  sound  commer- 
cial banking  and  the  tendency  of  such  a  practice  is  not  to  materi- 
ally increase  the  earning  power  of  the  bank,  but  to  greatly  en- 
danger the  safety  of  the  funds  of  depositors. 


ROMANCE  AND  TRAGEDY  OF  BANKING     53 

National  Bank  Circulation  v.  Government  Issues 

Although  the  national  banking  system  had  been  in  operation 
less  than  five  years  when  Mr.  Hulburd  was  appointed  Comptrol- 
ler, it  appears  that  the  question  was  then  being  agitated  of  doing 
away  with  the  note-issuing  function  of  the  national  banks  and 
the  substitution  of  Government  issues  instead. 

It  was  claimed  in  behalf  of  this  proposed  change  that  by  the 
payment  of  interest  by  the  Government  on  the  bonds  deposited 
by  the  banks  as  security  for  circulation,  the  banks  were  receiving 
a  bonus  from  the  Government  for  issuing  the  currency,  and  by 
issuing  its  own  notes  the  Government  could  save  this  bonus, 
which  at  that  time  amounted  to  about  eighteen  millions  of  dollars 
per  annum. 

While  admitting  the  plausibility  and  popularity  of  this  con- 
tention, Mr.  Hulburd  proceeded  to  show  the  evils  that  would 
result  from  such  a  policy  and  the  inflation  of  currency  which  it 
would  produce. 

The  withdrawal  of  the  note-issuing  privilege  from  the  banks, 
he  said,  would  result  in  nine  out  of  every  ten  of  the  banks  wind- 
ing up  their  business,  not  because  the  privilege  was  considered 
absolutely  essential  to  the  business  of  banking,  but  because  the 
banks  would  not  submit  to  the  restrictions  imposed  upon  them 
by  the  banking  laws  without  the  compensatory  privilege  of  issu- 
ing circulation.  He  claimed  that  they  would  liquidate  and  re- 
organize under  State  authority,  or  do  business  as  private  bankers, 
and  thus  rid  themselves  of  Federal  control  or  interference  with 
their  business. 

He  then  pointed  out  the  disastrous  effects  upon  the  business 
of  the  country  that  would  surely  follow  the  sudden  winding  up  of 
a  large  number  of  national  banks,  and  the  substitution  of  Gov- 
ernment issues  for  the  national  bank  currency.  The  government, 
he  said,  can  issue  its  own  notes  only  in  payment  of  its  debts,  and 
that  no  relation  existed  between  the  amount  that  might  be  re- 
quired and  issued  for  that  purpose,  and  the  amount  of  currency 
necessary  to  supply  the  demands  of  the  legitimate  business  needs 
of  the  country.  He  said  it  would  be  an  iron  currency,  without 
elasticity  and  with  no  relation  between  supply  and  demand. 


54  ROMANCE  AND  TRAGEDY  OF  BANKING 

He  then  discussed  in  detail  the  origin,  character  and  purpose 
of  the  legal-tender  issues  of  the  Government  as  disclosed  by  the 
debates  in  Congress  when  the  bill  to  provide  for  their  issue  was 
under  consideration.  He  quotes  Mr.  Spaulding,  who  introduced 
the  bill  in  January,  1862,  as  saying  that  he  offered  it  as  a  war 
measure,  a  measure  of  necessity,  and  not  of  choice,  to  meet  the 
most  pressing  demands  of  the  Treasury,  to  sustain  the  Army  and 
Navy  and  our  Government,  and  to  preserve  our  nationality. 

He  also  quoted  Senator  Fessenden,  of  Maine,  who  reported 
the  bill  from  the  Finance  Committee,  as  saying  that  the  com- 
mittee thought  in  giving  this  enlarged  power  to  the  Secretary 
of  the  Treasury,  the  country  should  be  assured  that  it  was  not 
to  be  resorted  to  as  a  policy,  but  that  it  really  was  what  it  pro- 
fessed to  be — only  a  temporary  measure  to  enable  the  Govern- 
ment to  meet  extraordinary  conditions. 

Senator  John  Sherman  was  quoted  as  saying  that  the  measure 
could  be  justified  only  upon  the  ground  of  necessity  and  that  if 
he  did  not  feel  that  the  necessity  existed  he  would  shield  himself 
behind  the  question  of  its  constitutionality  and  vote  against  it. 

Senator  Sumner,  of  Massachusetts,  supported  the  measure 
also  upon  the  grounds  of  urgent  necessity.  He  said  the  soldiers 
in  the  field  must  be  paid  and  fed.  This  admitted  of  no  failure  or 
postponement.  Whatever  may  be  the  national  resources,  they 
were  not  then  within  reach,  except  by  summary  process.  "Re- 
luctantly, therefore,  and  painfully,"  he  said,  "he  would  consent 
that  the  process  should  issue." 

The  bill  passed  February  5,  1862,  authorizing  the  issue  of 
legal-tender  notes  to  the  amount  of  $150,000,000.  On  July  llth 
following,  another  $150,000,000  was  authorized,  and  on  March  3, 
1863,  $150,000,000  more,  making  a  total  of  $450,000,000. 

In  discussing  the  bill  providing  for  the  last  issue,  Mr.  Spauld- 
ing said  that  he  was  averse  to  any  considerable  further  issue  of 
legal-tender  notes  and  would  consent  to  it  only  as  an  imperative 
necessity.  Too  large  an  issue,  he  said,  would  tend  to  inflate 
prices,  but  he  did  not  see  how  that  could  be  avoided.  He  could 
not  see  how  the  soldiers  were  to  be  paid  or  the  Government  car- 
ried on  otherwise. 


ROMANCE  AND  TRAGEDY  OF  BANKING     55 

In  February  and  July,  1862,  provision  was  made  for  the  con- 
version of  these  issues  into  five-twenty  bonds  whenever  the  holders 
should  present  them  at  the  United  States  Treasury  for  that  pur- 
pose, and  to  quiet  public  apprehension  as  to  any  further  issues, 
Mr.  Hulburd  stated  that  a  clause  was  inserted  in  the  Act  of 
June  30,  1864,  limiting  the  total  issues  to  $400,000,000,  and  such 
additional  amount,  not  exceeding  fifty  millions,  as  may  be  tem- 
porarily required. 

Mr.  Hulburd  declared  that  the  entire  theory  of  continuing 
and  augmenting  the  issue  of  United  States  notes  to  pay  the  debts 
of  the  Government  in  the  same  kind  of  paper  money  in  which 
they  were  contracted  was  an  after-thought  and  a  cunning  device, 
and  that  no  subject  had  been  more  obscured  by  crude  theories 
and  empirical  schemes  than  this  method  of  paying  the  public 
debt. 

Contrasting  this  form  of  circulation  with  the  paper  issues  of 
the  Government  during  the  period  of  the  Revolutionary  War, 
he  stated  that  the  Continental  Congress  issued  bills  which  were 
receivable  for  taxes.  The  thirteen  colonies  were  pledged  to  redeem 
these  bills  and  as  their  credit  began  to  fail,  Congress  declared 
that  whoever  should  refuse  to  receive  this  paper  as  gold  and  silver 
should  be  deemed  an  enemy  to  the  liberties  of  the  United  States. 
But  interest  was  stronger  than  patriotism,  and  as  the  amount 
increased,  its  value  went  rapidly  down  until,  at  last,  the  sum 
total  having  reached  two  hundred  and  fifty  millions,  it  became  so 
utterly  worthless,  about  the  year  1780,  that  it  ceased  to  circu- 
late. Austria,  Russia,  France  and  England  tried  the  same  ex- 
periment with  like  results,  and  Mr.  Hulburd  stated  that  there  is 
not  a  single  example  on  record  of  the  power  of  creating  money 
out  of  cheap  materials  having  been  exercised  by  a  sovereign  state 
for  any  length  of  time  or  through  any  season  of  public  difficulty, 
without  having  been  abused  by  over-issues.  The  experience  of 
this  country  during  the  last  years  of  the  Civil  War  and  immedi- 
ately following  its  close  was  but  a  repetition  of  the  experience 
of  other  countries  in  other  times. 

In  concluding  the  report  for  1867,  in  which  these  subjects 
were  discussed,  Mr.  Hulburd  said: 


56  ROMANCE  AND  TRAGEDY  OF  BANKING 

We  still  have  $8,000,000  of  gold  and  silver  in  the  coun- 
try waiting  to  be  called  into  active  service.  Give  these  millions 
their  place.  Make  room  for  them  by  calling  in  the  legal- 
tender  notes,  the  great  disturbing  element  of  our  currency, 
and  the  most  expensive  debt  the  government  has  incurrd  — 
gradually  if  you  please,  but  surely.  Enforce  rigidly  the 
redemption  of  national  bank  notes.  Retain  for  the  federal 
government  supervision  and  control  of  the  currency  of  the 
country  through  the  national  banks,  and  we  may  yet  realize 
the  great  desideratum  —  a  safe,  uniform  currency,  convertible 
into  coin  at  the  will  of  the  holder. 


Banknote  Redemption  Agency 

In  his  report  for  1868,  Mr.  Hulburd  urged  upon  Congress 
the  establishment  of  an  agency  for  the  redemption  of  national 
bank  notes  at  the  principal  center  of  trade.  He  stated  that  while 
objection  was  made  to  the  location  of  such  an  agency  at  New 
York  City  on  the  ground  that  it  would  render  the  country  banks 
tributary  to  New  York,  he  did  not  believe  that  this  objection  was 
well  founded,  but  if  it  were  true,  it  could  be  readily  obviated  by 
authorizing  the  organization  of  a  national  bank  in  New  York 
City,  without  circulation  privileges  in  which  every  national  bank 
should  be  required  to  become  a  stockholder.  Such  bank  to  have 
a  capital  of  from  one  to  twenty  millions  and  be  made  the  redemp- 
tion agency  for  the  whole  country  and  the  clearing-house  for  all 
national  bank  circulation. 

It  was  suggested  that  this  bank  should  be  owned,  controlled 
and  managed  by  the  banks  themselves,  with  two  departments,  one 
for  banking  purposes,  and  the  other  for  the  redemption  and  ex- 
change of  national  bank  circulation.  The  latter  department  was 
expected  to  pay  all  the  expenses  of  redemptions  and  exchanges, 
and  in  addition  thereto,  yield  a  revenue  for  the  bank's  stock- 
holders. 

This  plan,  Mr.  Hulburd  contended,  would  not  only  insure  the 
prompt  and  certain  redemption  of  all  the  circulation,  but  would 
make  it  actually  convertible  at  all  times. 

Mr.  Hulburd  also  expressed  the  opinion  that  the  establish- 
ment of  such  a  bank  would  remedy  the  evils  resulting  from  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  57 

practice  of  payment  of  interest  on  country  bank  balances  by 
making  such  balances  immediately  available  for  reserve,  instead 
of  being  loaned  on  call  to  speculators  and  brokers. 

This  idea  of  a  central  redemption  agency  was  subsequently 
partly  carried  into  effect  by  the  creation  of  the  National  Bank 
Redemption  Agency  and  its  location  in  the  Treasury  Depart- 
ment in  Washington  as  a  division  of  the  United  States  Treas- 
urer's office. 

Instances  of  Theft  in  Connection  With  Currency  Shipments 

In  1864  a  number  of  packages  of  notes  shipped  to  western 
banks  were  found  on  reaching  their  destination  to  be  short  of  the 
required  amount  by  one  sheet  in  each  package,  each  sheet  con- 
taining four  notes.  Similar  shortages  were  subsequently  discov- 
ered at  intervals  of  several  months.  For  a  period  of  nearly  a 
year  following  these  discoveries  no  additional  losses  were  re- 
ported. In  the  fall  of  1865,  sheets  of  money  began  to  be  missed 
from  the  packages  of  notes  in  the  vault  of  the  Bureau,  and  in 
December  of  that  year  a  package  containing  $4500  in  fifty  and 
one  hundred  dollar  notes  of  the  National  City  Bank  of  Lynn, 
Mass.,  was  missed.  These  thefts  ceased  again  until  about  May, 
1867,  when  a  package  containing  $12,000  in  fifty  and  one  hun- 
dred dollar  notes  of  the  First  National  Bank  of  Jersey  City, 
N.  J.,  disappeared. 

Investigation  was  made  at  the  time  each  of  these  thefts  oc- 
curred, and  efforts  were  made  to  discover  the  culprit,  but  without 
success,  until  the  last  package  was  taken.  The  theft  of  this  pack- 
age was  discovered  almost  immediately  after  its  disappearance, 
and  a  prompt  investigation  led  to  the  arrest  of  a  colored  messen- 
ger, who  was  employed  in  the  Issue  Division  of  the  Comptroller's 
office. 

It  appears  that  while  some  changes  were  being  made  in  the 
room  of  the  division,  this  messenger  was  sent  into  the  vault  with 
some  books  and  during  the  short  time  he  was  in  there  concealed  a 
money  package  under  his  vest.  He  had  been  previously  granted 
leave  of  absence  for  several  days,  and  after  stealing  the  package 
left  Washington  for  the  South,  where  he  put  some  of  the  notes  in 


58  ROMANCE  AND  TRAGEDY  OF  BANKING 

circulation  after  clumsily  affixing  signatures  to  the  notes  other 
than  the  names  of  the  president  and  cashier  of  the  bank.  The 
aggregate  of  the  notes  stolen  amounted  to  $17,560.  The  messen- 
ger was  arrested  and  indicted,  but  escaped  conviction  on  legal 
technicalities.  It  was  shown  at  the  trial  of  the  case  that  other 
employees  of  the  Comptroller's  office  had  access  to  the  vault  in 
which  the  money  was  stored,  and  the  evidence  offered  was  not  con- 
sidered sufficient  to  fasten  the  theft  upon  him.  A  motion  was  also 
made  to  quash  the  indictment  on  the  ground  that  it  recited  that 
money  had  been  stolen,  when  as  a  matter  of  fact,  incomplete  na- 
tional bank  notes,  it  was  contended,  are  not  strictly  money  until 
signed  by  the  officers  of  the  issuing  bank. 

The  Act  of  July  28,  1892,  settled  this  contention  by  provid- 
ing for  the  redemption  of  all  lost  or  stolen  notes,  or  notes  put  in 
circulation  without  signatures  or  upon  the  forged  signatures  of 
the  officers  of  the  bank. 

It  is  believed  that  this  messenger  was  responsible  for  all  the 
thefts  reported,  as  no  further  shortages  occurred  after  his  dis- 
missal from  the  office. 

Occasionally  sheets  of  notes  were  misplaced  or  small  discrep- 
ancies were  found  by  counters  of  worn-out  or  mutilated  notes  sent 
in  for  redemption,  but  these  shortages  were  generally  accounted 
for. 

About  the  time  these  money  shortages  were  being  discovered, 
a  package  of  vault  currency  was  missed  at  the  close  of  the  day's 
business,  which  gave  the  clerks  of  the  Issue  Division  several  hours 
of  anxiety  and  trouble.  The  entire  force  of  the  Division  was  de- 
tained as  late  as  ten  o'clock  at  night  while  search  was  being  made 
for  the  missing  package.  A  young  man,  an  employee  of  the  Di- 
vision, had  an  important  social  engagement  for  that  evening 
which  he  was  prevented  from  keeping  because  of  his  detention  at 
the  office  and  he  naturally  became  considerably  exasperated.  After 
the  vault  had  been  thoroughly  searched  for  the  missing  package, 
without  results,  this  young  man  in  temper  gave  one  of  the  desk 
chairs  which  was  in  his  way,  a  kick,  upsetting  it,  and  the  lost 
money  package  fell  off  the  chair  on  the  floor.  Upon  inquiry  as 
to  how  the  package  came  there  it  was  learned  that  an  absent- 
minded  money  counter  had  used  the  package  during  the  day  as  a 


KOMANCE  AND  TRAGEDY  OF  BANKING  59 

cushion,  her  chair  being  too  low  for  her  desk,  and  had  covered  it 
over  with  some  brown  wrapping  paper  which  concealed  it  from 
view,  and  had  forgotten  placing  it  on  the  chair. 

The  comments  of  the  clerks  who  had  been  detained  so  late  in 
the  search  for  the  package,  especially  those  of  the  young  man 
who  was  compelled  to  break  his  social  engagement,  may  be  better 
imagined  than  described. 

Great  Chicago  Fire  of  1871 

The  great  Chicago  fire  in  1871  occurred  during  the  closing 
year  of  Mr.  Hulburd's  administration.  The  buildings  in  which 
seventeen  of  the  eighteen  national  banks  in  that  city  were  located 
were  totally  destroyed.  The  loss  on  the  buildings  and  the  furni- 
ture and  fixtures  of  the  banks  was  estimated  at  about  $176,000, 
and  on  discounted  paper  at  about  $600,000. 

The  bills  receivable  held  by  the  banks  at  that  time  amounted 
to  over  $21,000,000,  and  their  liabilities  to  correspondent  banks 
and  depositors  to  over  $26,000,000.  The  contents  of  the  vaults, 
however,  when  opened,  were  found  to  be  in  a  good  condition,  and 
notwithstanding  the  great  destruction  of  property  the  banks  re- 
sumed business  in  eight  days  after  the  conflagration,  in  tempo- 
rary quarters  which  they  secured  in  dwellings  remote  from  their 
former  locations.  At  the  close  of  the  first  day's  business  the  de- 
posits of  customers  and  correspondent  banks  exceeded  the  dis- 
bursements, instead  of  balances  being  largely  withdrawn  as  was 
anticipated. 

A  glowing  tribute  was  paid  Mr.  Hulburd  by  his  successor  in 
his  first  annual  report  to  Congress,  for  the  skillful  manner  in 
which  he  handled  the  Chicago  situation  at  that  time,  and  the  valu- 
able service  he  rendered  in  bringing  about  so  early  a  resumption 
of  business. 

Bank  Failures  During  Hulburd's  Administration 

In  the  report  of  Comptroller  Hulburd  for  1866,  three  banks 
are  listed  as  having  been  placed  in  the  hands  of  receivers  during 
the  three  years  of  existence  of  the  national  banking  system.  The 


60  ROMANCE  AND  TRAGEDY  OP  BANKING 

cause  assigned  for  the  appointment  of  receivers  for  these  banks 
was  failure  to  redeem  their  circulating  notes  on  demand. 

As  no  holder  of  a  national  bank  note  ever  lost,  or  could  lose  a 
dollar  by  reason  of  the  failure  of  the  issuing  bank  to  redeem  its 
circulation,  the  notes  being  absolutely  secured  by  a  deposit  of 
United  States  bonds  in  the  Treasury  of  the  United  States,  re- 
deemable at  par  by  the  Government,  it  would  seem  unreasonable 
and  unnecessary  to  close  a  bank  because  of  failure  to  redeem  its 
circulating  notes  when  presented  at  the  bank  for  that  purpose. 

In  the  table  of  failures,  whicli  appears  in  the  reports  of  the 
Comptroller  for  subsequent  years,  containing  a  list  of  receivers 
appointed  for  insolvent  banks  from  the  beginning  of  the  national 
system,  a  different  cause  than  the  failure  to  redeem  circulation  is 
assigned  for  the  closing  of  the  three  banks  above  referred  to. 
"Injudicious  banking  and  failure  of  large  debtors,"  are  the  rea- 
sons given  in  one  case,  and  "injudicious  banking"  in  the  other  two. 

In  explanation  of  these  apparent  discrepancies,  it  appears 
that  in  the  early  years  of  the  system  when  a  bank  became  insol- 
vent, or  subject  to  a  receivership  for  some  other  cause,  it  was  the 
practice  to  obtain  and  present  for  redemption  at  the  bank's  coun- 
ter one  of  its  circulating  notes.  By  agreement  between  the  bank 
and  a  representative  of  the  Comptroller's  office,  the  bank  would 
refuse  to  redeem  the  note  and  the  note  would  then  be  protested, 
thus  affording  a  statutory  ground  for  the  appointment  of  a 
receiver. 

This  was  a  friendly  kind  of  a  proceeding  and  brought  the 
Comptroller  well  within  his  statutory  right  to  close  and  take  pos- 
session of  the  association,  as  the  law  specifically  provides  for  the 
appointment  of  a  receiver  upon  failure  of  a  bank  to  redeem  its 
circulation  on  demand. 

Comptrollers  in  those  days  were  scrupulously  conservative  in 
the  exercise  of  the  supervisory  powers  conferred  upon  them  by 
law,  and  in  order  to  avoid  any  question  of  their  right  to  close  and 
take  possession  of  an  association  resorted  to  the  procedure 
described. 

They  recognized  the  fact  that  the  same  laws  that  govern  the 
national  banks  and  define  their  corporate  powers  prescribe  also 
the  duties  and  powers  of  the  Comptroller  of  the  Currency  and 


ROMANCE  AND  TRAGEDY  OF  BANKING  61 

limit  his  authority,  and  that  the  Comptroller  has  no  more  right 
to  disregard  the  law  by  transcending  his  powers  or  neglecting 
to  perform  his  duties  than  the  banks  have  to  exceed  their  corpo- 
rate powers  or  to  violate  the  restrictive  provisions  of  the  statutes 
under  which  they  were  organized  and  operate,  and  from  which 
they  derive  their  powers. 

As  a  rule,  such  of  the  mistakes  as  Comptrollers  of  earlier 
years  are  alleged  to  have  made,  and  for  which  they  have  been 
severely  censured  and  criticised  in  the  public  prints  from  time  to 
time,  whether  justly  so  or  not,  were  not  attributable  to  a  too 
rigid  enforcement  of  the  banking  laws,  or  an  arbitrary  assump- 
tion of  powers  not  conferred  upon  them  by  the  statutes,  but 
rather  as  the  result  of  undue  leniency  extended  to  refractory  asso- 
ciations in  permitting  them  to  engage  in  questionable  or  unlawful 
practices  and  undertakings  not  authorized  or  contemplated  by 
the  National  Bank  Act,  and  to  temporizing  with  unsatisfactory 
or  dangerous  conditions  which  called  for  prompt  and  decisive  cor- 
rective measures  in  order  to  avert  inevitable  losses  that  would  im- 
peril the  safety  of  the  association  or  reduce  it  to  a  condition  of 
insolvency.  Comptrollers,  as  a  rule,  have  been  ultra-conservative 
in  their  dealings  with  the  banks,  and  the  mistakes  that  they  have 
made  in  the  administration  of  the  banking  laws  have  been  mostly 
those  of  omission  rather  than  of  commission. 

There  were  sixteen  national  bank  failures  during  Mr.  Hul- 
burd's  term  of  service.  The  largest  of  these  was  the  Ocean  Na- 
tional Bank  of  New  York  City,  which  was  placed  in  the  hands  of 
a  receiver  December  13,  1871. 

The  capital  stock  of  this  association  was  $1,000,000,  divided 
into  shares  of  the  par  value  of  fifty  dollars,  and  its  total  liabilities 
about  $3,250,000.  An  assessment  of  forty  per  cent,  was  levied 
upon  the  stock,  of  which  amount  $348,961  was  collected.  The 
creditors  were  paid  one  hundred  per  cent,  of  their  claims  with 
interest  from  the  date  of  closing,  and  the  trust  was  finally  closed 
April  20,  1892. 

Theodore  M.  Davis  was  appointed  receiver  of  this  bank  by 
Mr.  Hulburd.  In  1875,  charges  were  preferred  against  the  re- 
ceiver and  others  in  connection  with  the  administration  of  the 
trust.  The  receiver  was  charged  with  having  disposed  of  some 


62  ROMANCE  AND  TRAGEDY  OF  BANKING 

of  the  securities  of  the  bank  at  less  than  their  actual  or  market 
value  and  as  having  been  personally  interested  in  the  purchase  of 
these  securities. 

Under  authority  of  a  resolution  adopted  by  the  House  of 
Representatives  in  1874,  Forty-third  Congress,  the  Committee  on 
Banking  and  Currency  made  an  exhaustive  investigation  of  these 
charges  and  submitted  a  voluminous  report  of  the  testimony  taken 
and  of  the  conclusions  based  thereon.  The  investigation  covered 
the  period  from  December  12,  1871,  the  date  of  failure  of  the 
bank,  to  October  31,  1873,  the  date  of  the  last  general  statement 
made  by  the  receiver. 

It  appears  that  Mr.  Davis,  the  receiver,  was  charged  with 
entering  into  a  combination  or  conspiracy  with  James  A.  Ayer 
and  Isaac  H.  Knox,  of  the  firm  of  Boorman,  Johnston  &  Com- 
pany, to  defraud  debtors  of  the  bank  who  had  deposited  certain 
bonds  and  stocks,  known  as  the  first,  second  and  third  mortgage 
bonds  of  the  Portage  and  Lake  Superior  Ship  Canal  Company,  a 
corporation  chartered  by  the  State  of  Michigan,  for  the  purpose 
of  constructing  a  canal  to  connect  the  waters  of  Lake  Superior 
with  Portage  Lake.  These  stocks  and  bonds  were  held  by  the 
bank  as  collateral  for  loans  amounting  to  about  $561,000. 

It  was  alleged  that  the  receiver  disposed  of  a  large  amount  of 
these  securities  at  auction,  at  ruinous  rates,  to  Isaac  H.  Knox, 
an  alleged  confederate  of  the  receiver,  and  that  through  a  con- 
spiracy, the  lands  and  property  of  the  company  upon  which  these 
securities  were  issued,  were  about  to  pass  into  the  hands  of  a  com- 
bination in  which  the  receiver  was  interested,  the  debtors  claim- 
ing that  the  lands  and  property  were  worth  millions  more  than 
the  indebtedness  of  the  company  to  the  bank. 

The  evidence  taken  by  the  committee  shows  that  the  company 
was  insolvent  and  could  not  pay  its  indebtedness  to  the  bank  and 
others,  and  that  unless  the  securities  held  could  in  some  way  be 
made  valuable  the  bank  would  lose  the  whole  amount  of  the  loan 
of  $561,000.  It  appeared  further  that  this  could  be  done  only 
by  the  completion  of  the  canal,  which  would  require  a  large  addi- 
tional loan.  The  company  claimed  that  a  loan  had  been  nego- 
tiated, the  amount  of  which  would  have  been  sufficient  to  pay  the 
indebtedness  to  the  bank  in  full,  but  the  receiver  and  those  who 


63 

were  operating  with  him  defeated  the  negotiations  and  prevented 
the  representatives  of  the  company  from  obtaining  the  money.  It 
was  claimed  that  the  loan  was  negotiated  through  some  English 
parties  and  that  it  was  based  upon  the  security  of  rich  mineral 
lands  which  constituted  part  of  the  400,000  acres  granted  to  the 
State  of  Michigan  by  the  General  Government. 

The  receiver  denied  that  he  or  any  person  authorized  by  him 
in  any  manner  interfered  with  any  negotiations  that  the  com- 
pany, or  anyone  acting  for  the  company,  were  making  for  a  loan 
on  these  lands,  and  the  committee  reported  that  the  testimony 
failed  to  support  the  allegations  made  against  the  receiver  in  this 
respect. 

Another  complication,  however,  was  disclosed  by  the  evidence. 
The  debts  of  the  company  due  the  bank,  which  were  secured  by 
the  collateral  in  question,  were  all  subject  to  the  plea  of  usury, 
and  by  the  laws  of  New  York  such  a  defense  would  defeat  not 
only  the  collection  of  the  interest,  but  also  the  principal  of  the 
debt. 

The  committee  reported  that  the  company  was  willing  to 
waive  the  plea  of  usury,  if  time  were  given  it  to  negotiate  a  loan 
with  which  to  pay  its  debt  to  the  bank,  but  if  time  were  not  given 
and  the  company  were  pressed  for  payment,  usury  would  be 
pleaded.  The  receiver  had  no  confidence  in  the  company's  abilit}7 
to  negotiate  the  loan,  and  he  therefore  formed  a  syndicate  to  pur- 
chase the  securities  in  order  to  insure  the  payment  of  the  debt  to 
the  bank.  This  syndicate  was  composed  of  Dr.  James  C.  Ayer, 
Isaac  H.  Knox  and  himself.  Aycr  and  Knox  were  large  creditors 
of  the  canal  company.  The  object  of  this  syndicate  was  to  raise 
money  with  which  to  complete  the  canal  and  other  works  as  well, 
and  pay  the  debts  due  to  themselves  and  to  the  bank. 

The  terms  of  the  syndicate  were  submitted  by  the  receiver  to 
his  counsel,  who  expressed  the  opinion  that  the  contract  was  valid 
and  binding  and  believed  to  be  for  the  best  interests  of  the  bank, 
its  creditors  and  stockholders. 

In  furtherance  of  the  syndicate  plan  and  to  defeat  the  plea 
of  usury,  the  receiver  commenced  an  action  against  the  largest 
debtor  of  the  bank,  who  also  was  one  of  the  largest  stockholders 
in  the  canal  company,  and  forced  him  into  bankruptcy.  He  then 


64  ROMANCE  AND  TRAGEDY  OF  BANKING 

applied  for  and  received  an  order  from  the  court  to  sell  certain 
of  the  securities  in  question  which  were  held  by  the  bank.  The 
evidence  showed  that  the  securities  were  regularly  advertised  for 
sale  and  sold  to  the  highest  bidder,  in  open  market,  when  some  of 
the  owners  of  the  canal  were  present  and  protested  against  the 
sale,  and  that  Isaac  H.  Knox,  without  any  collusion  with  the  re- 
ceiver, purchased  $268,000  of  the  second  mortgage  bonds  at  an 
average  price  of  twenty-seven  cents.  Sales  of  the  same  kind  of 
bonds  were  made  by  other  parties  during  October,  November  and 
December,  1872,  and  in  July  and  December,  1873,  in  New  York 
City,  at  an  average  price  of  only  a  fraction  over  twenty  cents. 

The  committee  reported  that  all  these  sales,  so  far  as  the  testi- 
mony enabled  them  to  judge,  were  fair  and  in  accordance  with 
general  usage. 

The  evidence  showed  further  that  through  the  efforts  of  the 
receiver,  the  canal  work  had  all  been  completed,  and  to  do  this  it 
required  the  expenditure  of  from  four  to  five  hundred  thousand 
dollars,  all  of  which  sum  was  raised  by  Mr.  Knox  and  Mr.  Ayer. 

Following  the  completion  of  the  canal,  proceedings  were  com- 
menced and  a  decree  obtained  from  the  Circuit  Court  of  the 
United  States  for  the  State  of  Michigan  for  the  sale  of  all  the 
lands  of  the  canal  company,  the  proceeds  of  which  were  to  be  ap- 
plied to  the  payment  of  the  company's  debts. 

Messrs.  Ayer  and  Knox  declared  most  positively  that  the  re- 
ceiver was  not  in  any  way  interested  in  the  syndicate  except  as 
receiver  and  for  the  benefit  of  the  bank. 

In  concluding  their  report,  the  committee  expressed  the 
opinion  that  the  receiver  was  not  censurable  for  the  course  he 
had  pursued,  but,  on  the  contrary,  he  apparently  acted  in  good 
faith  and  did  what  he  considered  to  be  for  the  best  interests  of 
the  creditors  and  stockholders  of  the  bank. 

During  the  second  session  of  the  Forty-sixth  Congress,  this 
whole  matter  was  the  subject  of  further  investigation  by  the 
Banking  and  Currency  Committee  of  the  House  of  Representa- 
tives, under  authority  of  a  resolution  adopted  June  4,  1879,  and 
the  report  submitted  by  Mr.  Buckner  of  the  committee,  under 
date  of  May  19,  1880,  contains  a  most  scathing  denunciation  of 
the  receiver's  course  in  connection  with  the  canal  company. 


ROMANCE  AND  TRAGEDY  OF  BANKING  65 

The  report  reviews  at  length  the  testimony  taken  by  the  com- 
mittee of  the  Forty-third  Congress,  but  reaches  a  wholly  differ 
ent  conclusion. 

The  report  condemns  the  action  of  the  receiver  in  depreciat- 
ing the  value  of  the  canal  company  bonds  previous  to  their  sale 
to  the  syndicate  by  publicly  proclaiming  that  they  were  without 
value  and  that  the  debt  to  the  bank  was  wholly  unsecured. 

These  bonds,  it  was  claimed,  had  been  selling  from  fifty  to 
seventy-five  cents  up  to  that  time,  and  the  opinion  publicly  ex- 
pressed by  the  receiver  that  the  land  grant  would  fail  and  thereby 
make  the  security  invalid,  necessarily  depressed  the  price  of  the 
bonds  and  militated  against  the  interests  he  was  bound  to  protect 
and  advance.  Such  conduct,  the  committee  said,  could  not  be 
justified  by  any  theory  creditable  to  his  sagacity  or  his  fidelity, 
and  that  it  was  his  duty  to  have  observed  silence  and  to  have  dis- 
posed of  the  bonds  as  rapidly  and  advantageously  as  possible 
under  authority  of  the  court. 

It  was  the  opinion  of  the  committee  that  this  departure  from 
a  faithful  discharge  of  his  duties  to  the  creditors  and  owners  of 
the  bank  was  the  inception  of  a  plan  well  matured  and  skillfully 
executed  by  which  the  receiver  would  ultimately  obtain  the  con- 
trol and  ownership  of  the  property  and  franchise  of  the  canal 
company  for  himself  and  his  friends. 

The  exact  terms  of  the  syndicate  agreement,  it  was  stated, 
were  not  made  known  to  the  committee  which  first  investigated 
this  matter  in  1874,  having  been  excluded  upon  the  ground  that 
it  might  affect  the  litigation  pending  at  that  time. 

At  the  time  of  the  second  investigation,  in  1880,  this  litiga- 
tion had  been  concluded.  The  canal  company  had  been  placed  in 
bankruptcy,  its  property  had  been  sold,  and  a  new  company  had 
been  formed  with  Mr.  Davis,  the  receiver  of  the  bank,  as  its  presi- 
dent. This  company  was  then  the  owner  of  the  property  and  in 
possession  of  it. 

The  committee  then  took  up  the  question  of  the  authority  of 
the  receiver  to  make  the  stockholders  and  depositors  of  the  un- 
fortunate bank  a  party  to  an  agreement  to,  as  the  report  ex- 
pressed it,  "wreck  the  canal  company."  Section  5234-,  of  the 
Revised  Statutes  of  the  United  States,  was  quoted  as  containing 


66  ROMANCE  AND  TRAGEDY  OF  BANKING 

the  full  measure  of  the  powers  and  duties  of  the  receiver  of  a 
national  bank.  This  section  provides  that  the  receiver  "shall, 
under  the  direction  of  the  Comptroller,  take  possession  of  the 
books,  records  and  assets  of  every  description,  of  such  associa- 
tion, collect  all  debts,  dues,  and  claims  belonging  to  it,  and  upon 
the  order  of  any  court  of  competent  jurisdiction,  may  sell  or 
compound  all  bad  or  doubtful  debts,  and  on  a  like  order  may  sell 
all  the  real  and  personal  property  of  such  association  on  such 
terms  as  the  court  may  direct,"  etc. 

It  was  contended  by  the  committee  that  the  receiver's  plain 
and  only  duty  and  authority  under  the  section  of  the  law  quoted 
was  to  have  applied  to  the  court  for  an  order  to  compound  or 
sell  the  debts  of  the  canal  company  to  his  trust,  but  that  no  such 
application  was  made  to  the  court  and  no  order  to  compound  or 
sell  was  obtained.  The  testimony  before  the  committee  showed, 
according  to  the  report,  that  the  receiver  applied  for  an  order 
to  compound  a  particular  debt  due  the  bank,  which  was  granted, 
but  the  only  evidence  that  he  acted  under  authority  of  the  court 
in  making  the  syndicate  contract  and  in  using  the  assets  of  the 
bank  in  this  illegal  arrangement  was  in  the  proceedings  of  the 
bank  against  one  Alfred  Wild,  a  debtor  of  the  bank,  to  put  him 
in  bankruptcy,  in  which  Wild  had  obtained  an  injunction  to  stay 
the  sale  of  some  of  the  canal  bonds  pledged  for  the  payment  of 
his  debt  to  the  bank. 

The  receiver  was  charged  by  the  committee  with  gross  per- 
version of  the  facts  in  attempting  to  justify  his  illegal  action  by 
the  approval  of  the  court  in  a  proceeding  in  which  his  syndicate 
plan  was  not  adjudicated  or  passed  upon  by  the  court. 

The  report  of  the  committee  on  the  previous  investigation  of 
this  matter,  it  was  stated,  did  not  approve  the  receiver's  course, 
but  attempted  to  justify  it  on  the  ground  "that  he  had  seen  fit 
in  his  own  way  to  save  the  debt,  which,  in  the  end,  would  pay  all 
depositors  and  leave  a  surplus  to  be  divided  among  the  stock- 
holders." In  other  words,  the  committee  said,  it  was  a  case  of 
the  end  justifying  the  means,  although  the  means  resorted  to 
were  unauthorized  and  contrary  to  law. 

The  receiver,  the  committee  stated,  also  fortified  himself 
behind  the  fact  that  two  Secretaries  of  the  Treasury  and  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  67 

Comptroller  of  the  Currency  had  approved  his  syndicate  plan, 
but  the  committee  denied  that  the? e  officials  had  any  authority  as 
executive  officers  of  the  Government  to  confer  upon  the  receiver 
any  power  to  do  that  which  the  law  had  vested  in  the  judicial 
departments. 

The  committee  expressed  the  opinion  that  if  the  receiver  had 
obeyed  the  law  and  had  not  subordinated  the  interests  of  the 
bank  to  his  own  purposes,  quite  as  much  or  more  might  have  been 
realized  on  the  bad  and  doubtful  debts  due  the  bank,  much  less 
interest  would  have  accumulated  against  the  bank,  and  the  stock- 
holders would  have  escaped  with  little  or  no  assessment  to  make 
good  the  deficiency  in  assets  to  meet  liabilities  to  creditors. 

The  committee  concludes  its  report  as  follows : 

There  is  no  leading  fact  in  evidence  before  the  com- 
mittee that  is  not  consistent  with  this  theory  of  his  conduct 
as  receiver.  And  back  and  behind  all  this  is  the  indisputable 
fact  that  to  accomplish  his  ends,  he  found  it  necessary  to 
disregard  the  plain  and  reasonable  provisions  of  law  enacted 
for  his  guidance,  and  to  throw  the  responsibility  of  his  acts 
upon  officers  who  had  no  more  power  than  he  to  disobey  or 
to  recommend  disobedience  to  its  positive  injunctions. 

The  officer  who  violates  the  commands  of  the  law,  enacted 
to  direct  or  control  him  and  to  protect  the  rights  of  others, 
cannot  complain  that  all  reasonable  and  fair  presumptions 
are  made  against  his  official  acts.  If  he  undertakes  to  dis- 
charge the  duties  imposed  upon  him  by  law  in  his  own  way 
and  not  in  the  way  pointed  out  by  that  law,  he  assumes 
responsibilities  that  are  not  to  be  evaded,  although  the 
motives  of  his  action  may  appear  to  have  been  far  more 
creditable  than  those  which  seem  to  have  controlled  the 
receiver  of  the  Ocean  National  Bank. 

The  committee  declared  that  but  for  the  fact  that  the  re- 
ceivership was  so  near  its  final  closing,  a  resolution  would  have 
been  reported  to  the  House  recommending  the  receiver's  removal 
from  office,  and  expressed  the  opinion  that  the  assessed  stock- 
holders, or  any  of  them,  could,  without  additional  legislation, 
prosecute  an  action  against  the  receiver  to  recover  from  any  of 
the  assets  of  the  bank  remaining  in  his  hands  the  amount  of  the 


68  ROMANCE  AND  TRAGEDY  OF  BANKING 

assessment  which  they  were  forced  to  pay,  or  to  institute  a  suit 
on  his  official  bond  for  a  breach  of  its  conditions. 

This  report  was  signed  by  Hon.  A.  H.  Buckner  and  seven 
other  members  of  the  Committee  on  Banking  and  Currency. 

Hon.  W.  W.  Crapo  and  Hon.  S.  B.  Chittcnden,  members  of 
the  committee,  also  signed  it,  but  with  the  following  qualifi- 
cations : 

We  concur  in  the  above  report,  so  far  as  it  condemns 
the  departure  from  the  directions  given  in  the  national 
banking  law  to  receivers  in  the  liquidation  of  the  assets  of 
national  banks.  It  was  the  duty  of  the  receiver  of  the 
Ocean  National  Bank. to  comply  strictly  with  the  terms  of 
the  statute  in  the  disposition  of  the  assets  placed  in  his 
hands.  Instead  of  doing  so,  he  exercised  a  discretion  which, 
•even  if  well  intended,  was  unwise  and  in  violation  of  law. 

The  conclusions  expressed  by  the  majority  and  minority  mem- 
bers of  this  committee  as  to  the  powers  and  duties  of  a  receiver 
of  a  national  bank  are  absolutely  sound,  and  it  would  be  well  for 
every  receiver  of  such  a  bank  to  follow  strictly  this  wholesome 
admonition. 

And  this  advice  applies  with  equal,  if  not  greater  force,  to 
Comptrollers  of  the  Currency.  The  acts  of  the  receiver  are  sub- 
ject to  the  approval  of  the  Comptroller  and  all  failed  banks  are 
liquidated  under  his  general  directions.  If  the  receiver  and  the 
Comptroller  adhere  strictly  to  the  law  in  the  liquidation  of  the 
affairs  of  insolvent  banks,  even  then  their  acts  will  be  sometimes, 
and  frequently  have  been,  subject  to  the  criticisms  of  those  whose 
interests  are  or  have  been  affected  thereby.  But  when  they  dis- 
regard the  well-defined  rules  prescribed  by  the  statute  for  the 
liquidation  of  a  trust,  they  assume  a  responsibility  for  which 
they  are  individually  liable  under  their  bonds. 

The  conditions  complained  of  and  condemned  by  the  Banking 
and  Currency  Committee  in  1880  have  not  been  without  their 
parallel  in  later  years,  as  far  as  they  relate  to  methods  pursued 
in  the  liquidation  of  receiverships  and  the  handling  of  insolvent 
banks  contrary  to  the  manner  prescribed  by  law,  and  some  of 


ROMANCE  AND  TRAGEDY  OF  BANKING  69 

these  methods  would  not  stand  the  test  of  the  courts  or  Congres- 
sional investigation. 

In  dealing  with  the  property  rights  of  others  in  the  liquida- 
tion of  failed  banks  the  closer  the  Comptroller  of  the  Currency 
adheres  to  the  plain  letter  and  spirit  of  the  national  banking 
laws,  and  requires  his  subordinates  to  do  likewise,  the  less  liable 
he  will  be  to  mistakes,  criticism  and  responsibility  for  the  results, 
even  though  such  results  may  not  be  as  satisfactory  as  those 
which,  in  his  judgment,  might  have  been  reached  through  some 
other  course  or  procedure  which,  if  successful,  would  not  ma- 
terially benefit  the  creditors  of  the  failed  bank,  but  if  unsuccess- 
ful would  subject  him  to  censure.  The  Comptroller  of  the  Cur- 
rency is  no  more  justified  in  embarking  in  experimental  methods 
in  the  liquidation  of  an  insolvent  national  bank,  because  of  the 
possibility  of  attaining  better  pecuniary  results  by  pursuing  a 
course  other  than  that  prescribed  by  law,  than  the  banker  was 
in  the  first  instance  in  making  the  unlawful  and  speculative  ven- 
tures in  anticipation  of  greater  possible  profits  which  involved 
the  bank  in  the  losses  which  made  the  receivership  necessary. 

The  worst  feature  of  this  kind  of  administration  is  the  danger- 
ous precedent  and  bad  example  it  sets  for  the  younger  officials  of 
the  Government  service,  who  are  trained  in  an  atmosphere  im- 
pregnated with  a  disregard  of  legal  restrictions,  and  are  taught 
to  believe  that  administrative  policy  and  business  expediency  are 
superior  to  law  and  order  and  that  the  end  sought  to  be  accom- 
plished justifies  the  means. 

In  no  Bureau  of  the  several  executive  departments  did  this 
policy  prevail  to  so  great  an  extent  as  in  the  Currency  Bureau 
during  the  administration  of  President  Taft,  but  without  his 
knowledge  and  contrary  to  his  emphatically  expressed  public 
utterances  on  the  subject. 

Amendments  to  the  Laws  Enacted 

During  Mr.  Hulburd's  administration,  the  law  was  amended 
to  provide  a  penalty  for  imitating  national  bank  circulation;  for 
the  refunding  of  excessive  tax  on  circulation;  restricting  State 
taxation  of  shares  of  national  bunk  stock;  prohibiting  loans  on 


70  ROMANCE  AND  TRAGEDY  OF  BANKING 

the  credit  of  United  States  or  national  bank  notes  and  the  with- 
holding of  such  notes  from  circulation;  requiring  reports  of  con- 
dition and  of  earnings  and  dividends  to  be  made  to  the  Comp- 
troller; prescribing  a  penalty  for  false  certification  of  checks; 
and  for  embezzlement,  abstraction,  misapplication,  etc.,  of  any 
moneys,  funds  or  credits  of  a  bank ;  making  false  entries  in  the 
books  of  the  association,  in  reports  to  the  Comptroller,  etc. ;  for 
the  retirement  of  circulation  by  liquidating  banks ;  and  providing 
for  the  organization  of  banks  to  issue  gold  notes. 

This  latter  Act  provided  that  upon  the  deposit  of  any  United 
States  bonds,  bearing  interest  payable  in  gold,  with  the  Treasurer 
of  the  United  States,  in  the  manner  prescribed  by  the  national 
bank  act,  the  Comptroller  of  the  Currency  was  authorized  to 
issue  to  such  associations  circulating  notes  to  an  amount  not 
exceeding  eighty  per  centum  of  the  par  value  of  the  bonds  depos- 
ited, redeemable  upon  presentation  in  gold  coin  of  the  United 
States,  and  the  banks  issuing  such  notes  were  required  to  carry 
a  reserve  against  them  of  not  less  than  twenty-five  per  centum 
of  the  circulation  outstanding,  in  gold  or  silver  coin  of  the  United 
States. 

There  were  ten  associations  organized  under  this  Act,  nine 
of  which  were  located  in  California,  and  one  at  Boston,  Mass. 

The  Act  of  February  14,  1880,  authorized  the  conversion  of 
all  such  banks  into  regular  currency  associations.  Seven  of  these 
banks  reorganized  as  currency  associations  and  three  went  into 
voluntary  liquidation,  the  last  one  in  February,  1880,  since  which 
date  there  has  been  no  national  gold  bank. 


JOHN  JAY  KNOX 
Comptroller  of  the  Currency,  1872-1884 


CHAPTER  VI 

John  Jay  Knox 

JOHN  JAY  KNOX,  the  fourth  Comptroller  of  the  Currency, 
was  appointed  April  25,  1872,  to  succeed  Mr.  Hulburd,  and 
served  until  April  30,  1884. 

He  was  born  at  Knoxboro,  Oneida  County,  New  York,  in 
March,  1828,  and  graduated  from  Hamilton  College,  New  York, 
in  1849.  After  graduation,  he  entered  the  Bank  of  Vernon,  New 
York,  of  which  his  father  was  president  for  over  twenty  years, 
and  later  assisted  in  the  organization  of  banks  at  Syracuse  and 
Binghamton,  N.  Y.,  under  the  free  banking  law  of  New  York 
State.  Subsequently,  he  went  to  Minnesota  and  started  a  pri- 
vate bank  at  St.  Paul  with  his  brother,  who  afterward  was  Public 
Examiner  for  the  State  of  Minnesota. 

At  the  outbreak  of  the  Civil  War,  he  wrote  an  article  advo- 
cating the  passage  of  a  national  banking  law,  which  was  pub- 
lished in  Hunt's  Merchants'  Magazine.  This  article  attracted 
the  attention  of  Secretary  Chase  and  others,  and  when  Mr.  Knox 
visited  Washington  after  the  passage  of  the  National  Bank  Act 
he  called  upon  Secretary  Chase,  who  introduced  him  to  Mr.  Mc- 
Culloch,  which  led  to  his  appointment  as  a  clerk  in  the  office  of 
the  Treasurer  of  the  United  States.  Shortly  afterward  he  was 
transferred  to  the  Secretary's  office  as  a  disbursing  clerk.  He 
resigned  after  about  three  years'  service  to  accept  the  position 
of  cashier  of  the  Exchange  National  Bank  of  Norfolk,  Va.  He 
did  not  retain  this  position  very  long,  but  re-entered  the  service 
of  the  Treasury  Department  as  a  clerk  and  was  shortly  there- 
after detailed  by  Secretary  Chase  to  make  an  examination  of  the 
San  Francisco  Mint.  He  also  examined  the  Sub-Treasury  at 
New  Orleans,  in  which  he  discovered  a  shortage  of  $1,100,000. 
This  shortage  was  reduced  by  recoveries  to  about  $680,819.53. 
Proceedings  were  instituted  against  the  former  Assistant  Treas- 
urer, but  upon  trial  he  was  acquitted.  Mr.  Knox  remained  in 


72  ROMANCE  AND  TRAGEDY  OF  BANKING 

charge  of  the  Sub-Treasury  and  acted  as  Assistant  Treasurer 
for  several  months. 

The  discovery  of  this  shortage  was  followed  immediately  by 
the  failure  of  the  First  National  Bank  of  New  Orleans,  in  May, 
1867.  Thomas  P.  May,  who  had  been  the  United  States  Assist- 
ant Treasurer  at  New  Orleans,  resigned  that  position  to  accept 
the  presidency  of  this  bank  several  months  previous  to  its  failure. 
He  was  a  director,  but  not  president,  at  the  date  of  suspension. 
While  president  he  was  its  sole  manager,  and  as  a  director  he 
was  equally  potent  in  the  conduct  of  the  bank's  affairs.  Subse- 
quently it  was  discovered  that  he  was  largely  in  arrears  to  the 
United  States  as  Assistant  Treasurer,  and  the  deficit  increased 
under  his  successor,  apparently  for  his  benefit.  The  total  defal- 
cation of  both  amounted  to  the  sum  above  stated.  When  the 
defalcation  was  discovered  by  Mr.  Knox  the  bank  suspended. 

In  1867,  Mr.  Knox  was  appointed  Deputy  Comptroller  of  the 
Currency,  and  while  holding  this  position  had  supervision  of  the 
mint  and  coinage  correspondence.  He  revised  and  codified  the 
laws  relating  to  mint  and  coinage,  covering  a  period  of  about 
eighty  years'  legislation,  and  drafted  a  bill  for  the  Secretary  of 
the  Treasury  embodying  this  codication,  which  was  submitted  by 
the  Secretary  to  Congress,  with  some  modifications,  and  later 
was  enacted  into  law  and  has  since  been  known  as  the  "Coinage 
Act  of  1873." 

Mr.  Knox  has  the  distinction  of  having  held  the  office  of 
Comptroller  of  the  Currency  for  a  longer  period  than  any  of  his 
predecessors  or  successors,  having  served  twelve  years  as  Comp- 
troller and  over  five  years  as  Deputy  Comptroller,  from  March  12, 
1867,  to  April  24,  1872.  He  resigned  as  Comptroller  to  accept 
the  presidency  of  the  National  Bank  of  the  Republic  of  New 
York  City,  which  position  he  retained  until  his  death,  which 
occurred  in  New  York  City,  February  9,  1892. 

Mr.  Knox  was  a  practical  banker  and  financier.  He  was  an 
ardent  lover  of  figures  and  took  special  delight  in  delving  into  and 
analyzing  statistics.  On  one  occasion  he  prepared  an  address 
for  delivery  before  the  American  Bankers'  Association,  entitled 
"Dry  Statistics,"  which  he  declared  to  be  more  interesting  to  him 
than  any  novel.  A  large  part  of  the  analytical  deductions  of  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  73 

tables  contained  in  his  numerous  reports  to  Congress  he  worked 
out  personally.  He  was  a  great  writer,  and  much  of  his  time 
while  Comptroller  was  occupied  in  the  preparation  of  addresses 
and  articles  for  the  public  prints  on  banking  and  currency 
subjects. 

Besides  his  twelve  annual  reports  to  Congress,  which  contain 
invaluable  statistical  information  in  regard  to  banking  in  the 
United  States,  and  discussions  of  monetary  and  banking  ques- 
tions, he  was  the  author  of  a  history  of  the  various  forms  of 
paper  money  issued  by  the  Government,  entitled  "United  States 
Notes,"  and  at  the  time  of  his  death  was  engaged  in  completing 
a  "History  of  Banking  in  the  United  States,"  which  was  revised 
and  completed  by  Bradford  Rhodes,  editor,  and  Elmer  H.  Young- 
man,  associate  editor  of  The  Bankers  Magazine  of  New  York, 
and  published  by  Bradford  Rhodes  &  Company  in  1900. 

When  Mr.  Knox  assumed  charge  of  the  Currency  Bureau  in 
1872  the  national  banks  chartered  numbered  only  1971,  and  when 
he  retired  in  1884  this  number  had  increased  to  3170.  During 
that  period  the  banks  adhered  more  closely  to  the  provisions  and 
limitations  of  the  banking  laws  in  the  character  of  the  business 
they  transacted  and  the  scope  of  their  operations  than  they  do 
at  the  present  time.  Many  of  the  questions  and  conditions  which 
subsequent  Comptrollers  have  had  to  deal  with  were  unthought 
of  in  Mr.  Knox's  time,  so  that  supervision  of  the  banks  was  not 
nearly  so  onerous  then  as  it  has  been  in  subsequent  years,  and 
he  had  more  opportunity  to  indulge  in  his  favorite  pastime  of 
writing  essays  on  banking  and  currency  questions  and  delving 
into  statistics  than  Comptrollers  of  later  years  have  had,  whose 
time  has  been  fully  absorbed  in  handling  the  steadily  increasing 
volume  of  business  and  correspondence  that  has  come  before  the 
Bureau,  leaving  them  little  opportunity  for  special  work. 

Mr.  Knox,  like  his  predecessor,  Mr.  McCulloch,  had  an  ex- 
alted opinion  of  the  dignity  and  importance  of  the  office  of  Comp- 
troller of  the  Currency.  He  was  exceedingly  sensitive  in  regard 
to  official  etiquette,  and  resentful  of  any  interference  with  or 
infringement  upon  his  statutory  prerogatives.  At  one  time  a 
chief  clerk  of  the  Treasury  Department  issued  an  order  prohibit- 
ing any  visitors  from  calling  upon  any  officer  or  employee  of  the 


74  ROMANCE  AND  TRAGEDY  OF  BANKING 

Department  during  business  hours  without  first  obtaining  his  per- 
mission. As  the  story  goes,  Mr.  Knox  disregarded  this  order, 
and  when  the  chief  clerk  learned  of  this  he  sent  for  him  to  come 
to  his  office.  The  assurance  of  this  official  so  aroused  Mr.  Knox's 
indignation  that  he  sent  him  word  that  if  he  wanted  to  see  him 
he  could  find  him  at  his  desk.  When  the  chief  clerk  called  upon 
him  a  brief  and  breezy  interview  followed,  ending  in  Mr.  Knox 
ordering  the  presumptive  chief  clerk  out  of  his  room  and  curtly 
inviting  him  to  mind  his  own  business. 

Mr.  Knox  was  very  highly  regarded  by  the  officials  of  the 
Treasury  Department  with  whom  he  came  in  contact,  and  partic- 
ularly by  the  subordinate  officers  and  clerks  of  the  Currency 
Bureau,  to  whom  he  was  ever  kind  and  considerate,  and  no 
stronger  or  more  deserving  tribute  could  be  paid  to  his  memory 
and  characteristics,  or  expressions  of  the  esteem  with  which  he 
was  held  by  the  bankers  and  business  men  of  New  York  City, 
among  whom  he  spent  the  last  years  of  his  life,  than  that  con- 
tained in  the  closing  lines  of  a  resolution  adopted  by  the  Cham- 
ber of  Commerce  of  that  city  at  the  time  of  his  death,  which 
reads  as  follows : 

Patriotic  in  his  impulses,  strong  in  his  convictions, 
thoughtful  but  reserved,  modest  yet  courageous,  a  deep 
thinker,  an  able  financier,  an  agreeable  companion,  a  kind 
friend,  an  upright  citizen,  and  a  courteous  Christian 
gentleman.  Such  is  our  judgment  of  his  character,  and 
so  shall  the  record  stand. 


Mr.  Knox's  Annual  Reports 

Of  the  twelve  annual  reports  made  to  Congress  by  Mr.  Knox 
during  his  long  service  as  Comptroller,  perhaps  the  most  inter- 
esting, at  least  the  one  that  seemed  to  be  most  in  demand,  is  the 
report  for  1876,  in  which  he  reviewed  other  systems  of  banking 
before  the  establishment  of  the  national  system,  beginning  with 
the  Bank  of  North  America  at  Philadelphia,  organized  in  1780. 
This  was  the  first  bank  that  had  any  direct  fiscal  relations  with 
the  Government.  The  First  and  Second  Banks  of  the  United 


ROMANCE  AND  TRAGEDY  OF  BANKING      75 

States  were  briefly  sketched  by  Mr.  Knox,  and  the  struggle  which 
led  to  the  dissolution  of  the  latter. 

This  report  also  contains  an  interesting  chapter  on  the  First 
Bank  of  Massachusetts,  incorporated  in  1782,  and  the  Suffolk 
system  of  redemption  of  banknotes.  The  Bank  of  New  York, 
which  began  business  in  1784,  under  articles  of  association  drawn 
by  Alexander  Hamilton,  who  was  one  of  its  first  directors,  and 
other  banks  subsequently  organized,  are  concisely  described, 
together  with  the  politics  of  that  period,  which  appeared  to  be  a 
controlling  factor  in  the  procurement  of  bank  charters  in  the 
early  days  of  the  Republic.  These  subjects  were  followed  by  a 
discussion  of  banking  in  general  as  conducted  throughout  the 
States  of  the  Union  before  the  national  banking  system  was 
established,  and  the  whole  question  is  presented  in  a  concise  and 
convenient  form,  which  makes  the  volume  a  most  interesting  book 
of  reference  for  students  of  banking  in  the  United  States  prior 
to  the  Civil  War. 


The  Panic  of  1873 

The  first  of  the  most  important  events  that  occurred  during 
the  administration  of  Mr.  Knox  was  the  panic  of  1873. 

Much  has  been  written  on  the  subject  of  panics  and  their 
causes,  and  various  theories  have  been  advanced  as  to  their  origin, 
but  hardly  any  two  writers  agree  in  whole  as  to  the  conditions 
which  produce  such  periodical  outbreaks  or  the  remedies  neces- 
sary to  prevent  their  recurrence. 

The  same  general  conditions  that  have  preceded  and  culmi- 
nated in  panics  have  existed  at  other  periods  and  have  been  suc- 
cessfully passed  over  without  any  material  disturbance.  Every 
panic  that  has  occurred  during  the  existence  of  the  national 
banking  system  has  found  its  precipitating  cause  in  some  bank  or 
business  failure  occurring  at  a  time  when  conditions  throughout 
the  country  were  favorable  to  disturbance.  The  same  initial  dis- 
turbance happening  at  another  period  would  probably  not  have 
extended  beyond  the  city  in  which  it  occurred. 

The  panic  of  1873  was  no  exception  to  this  rule.  Whatever 
may  have  been  the  underlying  conditions  which  made  the  time 


76  ROMANCE  AND  TRAGEDY  OF  BANKING 

propitious,  this  disturbance  started  in  New  York  City  in  the  fail- 
ure of  the  Warehouse  Security  Company,  which  suspended  Sep- 
tember 8th.  This  company  was  organized  for  the  purpose  of 
making  advances  to  dealers  in  grain  and  produce,  but  it  became 
involved  in  the  financing  of  the  Missouri,  Kansas  and  Texas  Rail- 
road. This  failure  was  followed  immediately  by  the  suspension 
of  the  banking  house  of  Kenyon,  Cox  &  Company,  which  became 
similarly  involved  through  the  indorsement  of  paper  of  the  Can- 
ada Southern  Railroad,  to  the  extent  of  about  $1,500,000.  Sev- 
eral of  the  smaller  stock-brokerage  firms  suspended  at  the  same 
time  and  were  followed  in  quick  succession  by  the  failure  of  Jay 
Cooke  &  Company,  Fisk  &  Hatch,  the  Union  Trust  Company, 
the  National  Trust  Company,  and  the  Commonwealth  National 
Bank,  of  New  York,  and  by  the  First  National  Bank  of  Wash- 
ington, D.  C.,  with  which  the  Cooke  family  were  connected.  The 
New  York  Stock  Exchange  closed  its  doors  for  the  first  time  in 
its  history  and  remained  closed  for  a  period  of  ten  days.  The 
panic  rapidly  extended  to  other  large  cities  and  soon  became 
general  throughout  the  country.  Currency  payments  were  sus- 
pended, at  first  by  the  New  York  banks,  and  later  by  the  banks 
in  other  large  cities,  and  legal-tender  notes  commanded  a  premium 
of  from  one-fourth  of  one  per  cent,  to  three  per  cent,  over  certi- 
fied checks.  The  New  York  Clearing  House  Association  resorted 
to  the  expedient  of  issuing  clearing-house  certificates  in  denomi- 
nations of  five  and  ten  thousand  dollars,  bearing  interest  at  seven 
per  cent.  Between  September  22,  the  date  of  the  first  issue  of 
these  certificates  in  1873,  and  November  20,  the  date  of  the  last 
issue,  $26,565,000  were  issued,  all  of  which  were  redeemed  and 
canceled  in  less  than  four  months  from  the  date  of  the  first  issue. 

These  certificates  took  the  place  of  cash  in  the  settlement  of 
balances  between  the  clearing-house  banks,  and  their  issue  had 
the  effect  of  restoring  confidence  of  the  banks  in  each  other  and 
the  resumption  of  currency  payments,  which  had  been  suspended 
for  about  forty  days. 

This  panic  occurred  in  the  midst  of  prosperity,  preceded  by 
four  or  five  years  of  general  activity  in  all  lines  of  industry. 
There  had  been  an  abundant  harvest.  The  marketable  value  of 
the  products  of  the  year  were  estimated  to  be  equal  to,  if  not 


ROMANCE  AND  TRAGEDY  OF  BANKING  77 

greater  than  that  of  the  several  previous  years,  and  there  was 
every  indication  of  a  good  fall  trade  which  had  already  set  in. 
What,  then,  was  the  cause  of  this  panic? 

In  his  annual  report  for  1873,  Mr.  Knox  ascribed  the  under- 
Iving  cause  to  be  as  follows : 

The  money  market  had  become  overloaded  with  debt, 
the  cost  of  railroad  construction  for  the  preceding  five  years 
being  estimated  to  have  been  $1,700,000,000,  or  about 
$340,000,000  annually,  while  debt  based  upon  almost  every 
species  of  property,  state,  city,  town,  manufacturing  cor- 
porations, and  mining  companies,  had  been  sold  in  the 
market.  Such  bonds  and  stocks  had  been  disposed  of  to  a 
considerable  extent  in  foreign  markets,  and  so  long  as  this 
continued  the  sale  of  similar  securities  was  stimulated  and 
additional  amounts  offered.  When  the  sale  of  such  se- 
curities could  no  longer  be  effected  abroad,  the  bonds  of  rail- 
roads and  other  enterprises  of  like  nature  which  were  in 
process  of  construction  were  thus  forced  upon  the  market, 
until  their  negotiation  became  almost  impossible.  The  bank- 
ers of  the  City  of  New  York,  who  were  burdened  with 
the  loan,  could  not  respond  to  the  demands  of  their 
creditors,  the  numerous  holders  of  similar  securities 
became  alarmed  and  the  panic  soon  extended  throughout  the 
country. 

The  banks  of  New  York  City,  Mr.  Knox  stated,  were  largely 
responsible  for  bringing  about  the  conditions  which  led  to  this 
panic.  Their  intimate  relations  with  the  transactions  of  the 
Stock  Exchange  contributed  in  a  great  measure  toward  creating 
and  fostering  the  fictitious  valuations  attained  at  home  and 
abroad  for  railroad  and  other  corporate  securities,  and  when  a 
foreign  market  could  no  longer  be  obtained  for  them  they  were 
unloaded  upon  an  already  surfeited  home  market,  which  collapsed 
under  the  strain  and  the  panic  followed. 

While  the  acute  stage  of  this  crisis  was  of  short  duration,  the 
country  at  large  did  not  fully  recover  from  the  business  prostra- 
tion resulting  therefrom  for  several  years,  and,  •  as  Mr.  Knox 
stated,  not  until  after  the  resumption  of  specie*  payments. 


78  ROMANCE  AND  TRAGEDY  OF  BANKING 

Resumption  of  Specie  Payments 

The  next  important  event  that  occurred  during  Mr.  Knox's 
administration  of  the  Currency  Bureau  was  the  resumption  of 
specie  payments  on  January  1,  1879. 

The  Act  of  January  14,  1875,  provided  for  and  required  the 
coinage  of  silver  in  denominations  of  10,  25  and  50  cents,  of 
standard  value,  to  be  issued  in  redemption  of  an  equal  number  and 
amount  of  fractional  currency  of  similar  denominations,  until  the 
whole  amount  of  such  fractional  currency  outstanding  should  be 
redeemed. 

This  Act  also  repealed  the  limitations  upon  the  aggregate 
amount  of  circulation  of  national  banking  associations  and  its 
distribution  equally  among  the  States  and  Territories. 

The  Secretary  of  the  Treasury  was  required  to  redeem  the 
legal-tender,  United  States  notes,  in  excess  of  $300,000,000,  to 
the  amount  of  80  per  centum  of  the  sum  of  national  bank  notes 
issued  to  new  banks  or  banks  increasing  their  circulation,  and  to 
continue  the  redemption  of  such  notes  until  the  amount  outstand- 
ing was  reduced  to  $300,000,000.  The  Secretary  was  also  re- 
quired, on  and  after  January  1,  1879,  to  redeem  in  coin  United 
States  legal-tender  notes  then  outstanding  upon  their  presenta- 
tion for  redemption  at  the  office  of  the  Assistant  Treasurer  in 
New  York,  in  sums  of  not  less  than  $50,  and  the  Secretary  was 
authorized  to  issue  bonds  of  the  United  States  as  described  in 
the  Act  of  Congress  approved  July  14,  1870,  to  provide  for  such 
redemptions. 

The  Legislative,  Executive  and  Judicial  Appropriation  Act 
of  June  21,  1879,  contained  a  provision  authorizing  the  Secre- 
tary of  the  Treasury  to  use  for  the  immediate  payment  of  pen- 
sions the  legal-tender  currency  in  the  Treasury  of  the  United 
States  for  the  redemption  of  fractional  currency. 

There  is  still  outstanding  in  fractional  currency  about 
$1,998,368.501,  a  large  part  of  which  never  will  be  presented  for 
redemption. 


'June  30,  1922. 


ROMANCE  AND  TRAGEDY  OF  BANKING     79 

In  commenting  upon  the  resumption  of  specie  payments  in  his 
report  for  1878,  Mr.  Knox  said  that  as  the  time  approached  for 
resumption,  strong  opposition  developed  and  desperate  efforts 
were  made  to  secure  a  repeal  of  the  Act,  on  the  ground  that  while 
it  was  conceded  by  those  who  opposed  resumption  that  the  Treas- 
ury and  the  banks  could  readily  redeem  their  circulating  notes, 
it  would  not  be  possible  for  the  banks  to  provide  for  the  redemp- 
tion of  their  deposits  in  gold. 

Notwithstanding  this  opposition  and  the  pessimistic  predic- 
tions of  those  who  were  opposed  to  the  attempt  at  resumption, 
and  the  return  of  the  Government  to  the  Hamiltonian  idea  of 
paying  its  debts  in  the  currency  of  the  world,  resumption  was 
successfully  consummated,  and,  as  Mr.  Knox  stated  in  his  report 
for  1878,  while  the  banks  of  the  country  at  the  date  of  resump- 
tion held  more  than  one-third  of  the  outstanding  Treasury  notes, 
they  had  so  much  confidence  in  the  ability  of  the  Secretary  of  the 
Treasury  to  successfully  maintain  resumption,  that  none  were 
presented  by  them  for  redemption.  At  the  same  time  the  people 
held  more  than  $300,000,000  of  the  issues  of  the  national  banks, 
based  upon  the  bonds  of  the  nation,  and  preferred  such  notes  to 
the  coin  itself.  There  was  no  demand,  therefore,  for  the  payment 
of  the  notes  of  the  Government,  and  the  gold  coin  in  the  Treasury 
increased  more  than  thirty-six  millions  in  the  ten  months  succeed- 
ing the  date  of  resumption. 

The  Freedman's  Savings  and  Trust  Company 

The  most  disastrous  bank  failure  that  occurred  while  Mr. 
Knox  was  Comptroller  was  that  of  the  Freedman's  Savings  and 
Trust  Company,  which  suspended  June  29,  1874. 

While  this  institution  was  not  under  Federal  supervision  at 
any  time  during  its  active  existence,  the  liquidation  of  its  affairs 
after  failure  was  finally  placed  in  charge  of  the  Comptroller  of 
the  Currency. 

During  the  progress  of  the  Civil  War,  when  the  colored  sol- 
diers became  a  considerable  element  in  the  military  service  of  the 
United  States,  it  became  necessary  to  make  some  provision  for 
the  safekeeping  of  their  pay  and  bounty  moneys  for  their  benefit 


80  ROMANCE  AND  TRAGEDY  OF  BANKING 

and  that  of  their  families.  To  meet  this  exigency,  military  sav- 
ings banks  were  established  at  Beaufort,  S.  C.,  and  Norfolk,  Va., 
centers  at  that  time  of  colored  troops.  The  subsequent  emanci- 
pation of  the  race  increased  the  necessity  for  and  suggested  the 
advisability  of  establishing  some  financial  agency  which  would 
more  fully  meet  this  demand,  and  Congress,  under  date  of 
March  3,  1865,  passed  an  Act  constituting  Peter  Cooper,  William 
C.  Bryant,  and  forty-eight  others,  a  body  corporate,  under  the 
title  of  the  "Freedman's  Savings  and  Trust  Company,"  to  re- 
ceive on  deposit  such  sums  of  money  as  should  from  time  to  time 
be  offered  by  or  in  behalf  of  persons  who  had  heretofore  been 
held  in  slavery  in  the  United  States,  or  the  descendants  of  such 
persons,  and  to  invest  the  same  in  the  stocks,  bonds,  Treasury 
notes,  or  other  securities  of  the  United  States. 

No  capital  stock  was  required,  but  in  lieu  thereof,  the  Charter 
Act  authorized  and  required  not  exceeding  one-third  of  the  de- 
posits to  be  retained  in  a  readily  convertible  form,  for  the  pur- 
pose of  meeting  withdrawals  and  to  defray  the  operating  expenses 
of  the  company. 

The  principal  office  of  this  institution  was  located  in  Wash- 
ington, D.  C.,  opposite  the  north  front  of  the  Treasury  Depart- 
ment, in  a  four-story  brownstone  building  owned  by  the  com- 
pany. After  the  bank  failed,  this  building  was  purchased  by  the 
Government  for  the  sum  of  $250,000.  For  some  years  thereafter 
it  was  occupied  by  the  Department  of  Justice  and  the  Court  of 
Claims  and  was  then  demolished  to  make  room  for  the  new  De- 
partment of  Justice  building  to  be  erected  on  the  site.  The  sum 
appropriated  by  Congress,  however,  was  not  deemed  sufficient  for 
the  erection  of  a  building  adequate  and  suitable  for  the  Depart- 
ment's needs,  so  the  site  remained  vacant  until  1918,  when  a  build- 
ing was  erected  thereon  by  the  Government  for  the  use  of  the 
Treasury  Department  and  is  connected  with  the  main  building 
by  a  tunnel  underneath  Pennsylvania  Avenue. 

At  the  date  of  the  failure  of  this  company  it  had  thirty-four 
branch  agencies  in  active  operation,  located  at  the  principal  cen- 
ters of  colored  population  in  Southern  States,  except  one  each 
in  New  York,  Philadelphia  and  Baltimore. 


ROMANCE  AND  TRAGEDY  OF  BANKING  81 

During  the  ten  years  of  its  active  existence,  the  deposits  in 
this  institution  aggregated  over  $57,000,000,  and  its  depositors 
numbered  over  70,000. 

From  1865  to  1870,  the  bank  seemed  to  have  been  honestly 
and  successfully  conducted  by  the  trustees  in  charge  of  its  affairs, 
and  apparently  enjoyed  the  full  confidence  of  its  depositors,  in 
the  knowledge  and  belief  that  their  deposits  were  required  by  the 
Charter  Act  to  be  safely  invested  in  the  stocks,  bonds,  treasury 
notes  and  other  securities  of  the  United  States. 

In  May,  1870,  however,  Congress  amended  the  act  of  incor- 
poration empowering  the  trustees  to  invest  one-half  of  the  de- 
posits received  "in  bonds  or  other  notes  secured  by  mortgages  on 
real  estate  in  double  the  value  of  the  loan." 

This  amendment  opened  the  door  to  the  wild  speculation  in 
real  estate  which  immediately  followed,  and  to  other  culpable 
transactions  which  soon  absorbed  the  funds  of  the  bank  and  led 
to  the  failure  of  the  institution. 

When  this  proposed  amendment  was  under  consideration  in 
the  Senate  in  1870,  Senator  Cameron  of  Pennsylvania  vigorously 
opposed  its  adoption  for  the  reasons,  he  said,  that — 

The  worst  thing  to  loan  money  upon  by  an  institution 
of  which  a  number  of  persons  have  the  direction  is  real 
estate. 

If  I  had  money  to  loan  and  did  not  care  about  using  it 
soon  and  wanted  to  invest  it  for  a  long  time,  I  might 
think  it  very  well  to  loan  it  upon  bond  and  mortgage,  be- 
cause I  should  myself  estimate  the  value  of  the  property 
which  was  offered  to  me  according  to  my  own  judgment. 
But  it  is  not  so  in  a  board  of  ten  or  fifteen  directors. 

Mortgages  are  all  right,  in  their  way.  They  are  good 
security  for  money,  but,  the  trouble  is,  money  once  in  them 
stays  there.  They  have  no  commercial  value.  They  have 
no  quotation.  Banks  loaning  their  money  upon  them  would 
soon  absorb  their  capital  and  find  themselves  exceedingly 
embarrassed  in  case  of  distress  or  a  panic.  They  are  not 
readily  converted,  and  it  is  only  idle  capital  that  seeks 
such  investments.  Banking  capital  is  of  a  different  charac- 
ter. If  tied  up  in  mortgages  or  other  investments,  its 
usefulness  becomes  paralyzed  and  the  law  defeated  under 


82  ROMANCE  AND  TRAGEDY  OF  BANKING 

which  the  bank  was  organized.  This  is  the  direct  cause  of 
the  unfortunate  condition  of  the  early  banks  in  Kansas, 
and  in  many  other  of  the  extreme  western  states  and  ter- 
ritories. They  loaned  money  to  settlers  at  fabulous  rates 
and  took  mortgages  upon  their  farms  in  violation  of  law. 
They  soon  came  to  grief  and  found  their  vaults  full  of 
mortgages  upon  real  estate  that  would  not  pay  twenty-five 
cents  on  the  dollar  and  their  money  all  gone. 

He  contended  further  that  the  principle  proposed  was  a  dan- 
gerous one,  and  should  not  be  incorporated  into  any  banking 
institution.  He  stated  that  it  had  been  his  experience  that  when- 
ever a  bank  like  the  Freedman's  Savings  and  Trust  Company  in- 
vested its  funds  in  real  estate  it  went  to  destruction.  This 
prophecy  was  fulfilled  four  years  later  by  the  failure  of  this 
bank. 

At  the  time  this  radical  change  was  authorized  in  the  char- 
acter of  the  securities  to  be  taken  for  loans,  the  deposits  amounted 
to  at  least  $2,000,OCO.  Had  the  original  Act  been  allowed  to 
remain  as  it  was  and  the  requirement  in  respect  to  investments 
been  complied  with,  as  they  undoubtedly  would  have  been,  the 
face  value  of  the  United  States  securities  which  the  bank  then 
should  have  had,  would  have  exceeded  the  sum  stated  by  a  very 
large  percentage,  and  their  market  value  would  have  been  much 
greater,  but  at  the  date  of  failure  of  the  bank  only  $400  in  United 
States  securities  were  found  among  the  assets. 

On  June  29,  1874,  the  bank  having  been  ascertained  to  be  in- 
solvent, was  closed  by  a  vote  of  its  trustees,  who  appointed  three 
Commissioners  to  wind  up  its  affairs.  These  Commissioners  served 
from  July  11,  1874,  to  February  21,  1881,  on  which  later  date, 
by  Act  of  Congress,  all  the  remaining  assets  of  the  bank  were 
transferred  to  the  custody  and  supervision  of  the  Comptroller 
of  the  Currency,  who  was  placed  in  charge  of  the  liquidation  of 
its  affairs,  and  was  allowed  compensation  of  one  thousand  dollars 
per  annum. 

At  the  time  of  the  failure  of  this  company  there  were  61,131 
depositors,  to  whom  there  was  due  $2,939,925.22.  Five  dividends 
were  declared,  amounting  to  sixty-two  per  cent,  of  the  deposit 


ROMANCE  AND  TRAGEDY  OF  BANKING  83 

liabilities,  aggregating  $1,822,753.62.  Payment  of  these  divi- 
dends was  made  from  time  to  time,  and  at  the  close  of  the  year 
ended  December  1,  1920,  $1,733,475.71  of  the  above-mentioned 
amount  had  been  paid  and  the  affairs  of  the  bank  finally  closed. 

Repeated  efforts  have  been  made  to  secure  an  appropriation 
by  Congress  for  the  payment  of  the  remaining  thirty-eight  per 
cent,  due  the  depositors,  and  bills  have  been  introduced  from  time 
to  time  and  favorably  reported  in  one  or  the  other  House.  In 
1888  a  bill  passed  the  Senate  authorizing  the  payment  to  depos- 
itors of  African  descent  the  difference  between  their  claims  and 
the  dividends  yielded  by  the  assets  of  the  company,  but  failed  of 
favorable  action  in  the  House  of  Representatives  because  of  the 
restriction  in  the  bill  to  the  payment  of  colored  depositors  only. 

While  this  institution  was  intended  to  be  a  colored  people's 
bank  exclusively,  and  the  Charter  Act  authorized  the  receipt  of 
deposits  only  "by  or  on  behalf  of  persons  heretofore  held  in  slav- 
ery in  the  United  States  or  their  descendants."  a  large  propor- 
tion of  the  depositors  were  white. 

The  reason  given  for  accepting  deposits  from  the  white  people 
was  that  the  officers  of  the  company  did  not  feel  that  it  was  in- 
cumbent upon  them  to  inquire  when  a  deposit  was  tendered  by  a 
white  person,  whether  it  was  being  made  on  behalf  of  a  colored 
person.  So  every  deposit  that  was  offered  was  received  without 
question. 

This  institution  was  not  under  Federal  supervision  and  the 
United  States  Government  was  in  nowise  responsible  for  its  man- 
agement. The  only  ground  upon  which  the  Government  can  be 
urged  to  assume  its  remaining  liabilities  is  one  purely  of  senti- 
ment. The  creditors  have  no  legal  claim  upon  the  Government. 
But  it  is  contended  that  illiterate  colored  people  were  induced  to 
deposit  their  money  in  this  bank  in  the  belief  that  it  was  a  Gov- 
ernment institution  and  that  the  Government  assumed  responsi- 
bility for  its  liabilities.  A  considerable  number  of  the  depositors 
in  this  company,  however,  were  intelligent  white  people,  and  many 
of  the  colored  depositors  were  as  intelligent  and  as  well  informed 
in  regard  to  the  character  of  the  institution  and  the  Govern- 
ment's connection  with  it  as  the  average  depositor  in  a  national 
bank.  So  far  as  the  Government's  relations  with  this  institution 


84  ROMANCE  AND  TRAGEDY  OF  BANKING 

are  concerned  the  creditors  of  an  insolvent  national  bank  have  a 
more  equitable  claim  on  Congress  for  an  appropriation  to  pay 
the  bank's  liabilities  than  have  the  depositors  in  the  Freedman's 
Savings  and  Trust  Company.  The  Government  docs  undertake 
to  assume  supervision  over  national  banks,  but  it  had  no  super 
vision  whatever  over  this  institution. 

If  Congress  should  appropriate  the  money  necessary  to  pay 
these  claims,  it  will  be  found  very  difficult  to  distribute  this  fund 
among  the  colored  creditors  or  their  heirs.  Most  of  the  original 
colored  depositors  are  dead,  and  because  of  the  inability  of  their 
heirs  to  prove  their  claims  for  balances  due,  it  was  almost  impos- 
sible to  distribute  any  considerable  amount  of  the  remaining  funds 
in  the  hands  of  the  Commissioner  since  the  repeal  of  the  bar  to 
further  payments,  and  during  the  later  years  the  larger  part  of 
such  fund  was  consumed  in  the  payment  of  the  salary  of  the  Com- 
missioner and  clerical  expenses.  The  small  amount  due  many  of 
these  colored  depositors  would  not  warrant  the  expense  of  prov- 
ing a  claim.  At  the  time  of  the  failure  of  this  institution  more 
than  fifteen  thousand  of  the  depositors  had  to  their  credit  an  aver- 
age balance  of  not  more  than  five  dollars.  As  a  great  many  of 
these  depositors  are  dead  and  most  of  them  left  several  heirs, 
some  of  whom  have  also  died,  the  death  of  the  depositor  and  any 
deceased  heir  would  necessarily  have  to  be  proven  by  the  surviv- 
ing heirs  to  entitle  them  to  receive  the  balance  due. 

It  is  exceedingly  doubtful,  therefore,  whether  the  class  of  col- 
ored depositors  in  this  institution  intended  to  be  relieved  by  such 
an  appropriation  would  be  benefited  thereby.  And  as  far  as  the 
other  depositors  are  concerned,  the  Government  would  establish 
a  very  bad  precedent  in  assuming  for  their  benefit  the  liabilities 
of  an  institution  for  whose  management  and  solvency  it  was  in 
nowise  responsible. 

Real  Estate  Loans  by  National  Banks 

Frequent  efforts  were  made  to  secure  an  amendment  of  the 
national  banking  laws  to  permit  loans  to  be  made  upon  the  secur- 
ity of  real  estate.  Bills  of  this  nature  were  introduced  from  time 


ROMANCE  AND  TRAGEDY  OF  BANKING  85 

to  time  and  passed  the  House  of  Representatives,  but  failed  of 
favorable  action  in  the  Senate. 

The  original  Bank  Act,  approved  February  25,  1863,  con- 
ferred authority  upon  national  associations  to  loan  money  "on 
real  and  personal  security."  The  Act  of  June  3,  1864,  contained 
the  same  provision  when  the  bill  was  reported  to  the  House  and 
Senate,  but  during  the  debate  on  the  bill  the  words  "real  and" 
were  eliminated,  and  the  provision  as  finally  adopted  read  "by 
loaning  money  on  personal  security." 

When  an  amendment  was  offered  to  the  bill  to  strike  out  the 
words  "real  and,"  Mr.  Brooks,  a  representative  from  New  York, 
said  that  the  banks  in  the  State  of  New  York  for  a  considerable 
time  discounted  notes  and  loaned  money  on  the  security  of  real 
estate  mortgages.  Experience,  however,  he  said,  soon  taught  the 
bankers  that  this  was  a  dangerous  system  of  banking,  and  the 
western  states  which  copied  the  original  banking  law  of  New  York 
suffered  greatly  thereby.  New  York  bankers,  he  said,  were  also 
taught  that  the  use  of  real  estate  in  commercial  banking  was 
unsafe. 

Mr.  Brooks  stated  further  that  the  principle  of  commercial 
banking  requires  two  immediately  available  securities:  First,  the 
drawer  of  the  note;  second,  the  endorser.  If  a  mortgage  on  real 
estate,  he  said,  is  given  as  security,  the  mortgage  has  to  be  fore- 
closed and  all  the  laws  in  relation  to  the  transfer  of  the  realty 
have  to  be  gone  through  with  before  the  real  estate  can  be  made 
available  for  the  purpose  of  converting  the  security  on  the 
market. 

Mr.  Washburne,  of  Illinois,  stated  that  the  provision  author- 
izing commercial  banks  to  loan  money  on  realty  was  a  vicious  sys- 
tem of  banking,  and  one  which  he  could  not  sanction. 

Mr.  Boutwell,  afterward  Secretary  of  the  Treasury,  said  that 
he  had  supposed  that  commercial  banks  empowered  to  loan  money 
on  real  estate  had  almost  ceased  to  exist  in  the  commercial  world. 

Mr.  Hooper,  of  Massachusetts,  who  was  in  charge  of  the  bill, 
stated  that  he  was  perfectly  willing  to  accept  an  amendment  to 
strike  out  the  objectionable  provision,  and  upon  his  motion  the 
words  "real  and"  were  stricken  out  of  the  bill  and  the  section 
amended  to  read  "by  loaning  money  on  personal  security."  This 


86  ROMANCE  AND  TRAGEDY  OF  BANKING 

amendment  was  adopted  without  division  and  remained  the  law  up 
to  the  passage  of  the  Federal  Reserve  Act,  December  23,  1913, 
which  provides  as  follows : 

Any  national  banking  association  not  situated  in  a 
central  reserve  city  may  make  loans  secured  by  improved 
and  unencumbered  farm  land,  situated  within  its  Federal 
reserve  district,  but  no  such  loan  shall  be  made  for  a  longer 
time  than  five  years,  nor  for  an  amount  exceeding  fifty 
per  centum  of  the  actual  value  of  the  property  offered  as 
security.  Any  such  bank  may  make  such  loans  in  an  ag- 
gregate sum  equal  to  twenty-five  per  centum  of  its  capital 
and  surplus  or  to  one-third  of  its  time  deposits  and  such 
banks  may  continue  hereafter  as  heretofore  to  receive  time 
deposits  and  to  pay  interest  on  the  same. 

The  Federal  Reserve  Board  shall  have  power  from  time 
to  time  to  add  to  the  list  of  cities  in  which  national  banks 
shall  not  be  permitted  to  make  loans  secured  upon  real  es- 
tate in  the  manner  described  in  this  section. 

There  is  no  doubt  that  the  elimination  from  the  National 
Bank  Act  of  1864  of  the  power  to  make  loans  upon  the  security 
of  real  estate  removed  a  dangerous  principle  from  the  banking 
laws,  and  contributed  largely  to  the  safety  and  success  of  the 
national  banking  system. 

The  subsequent  pressure  from  time  to  time  for  the  privilege 
of  making  real  estate  loans  came  largely,  if  not  wholly,  from 
banks  of  the  smaller  capital  class,  or  what  were  known  as  fifteen 
per  cent,  reserve  or  country  banks.  Since  the  passage  of  the  Act 
of  March  14,  1900,  authorizing  the  organization  of  banks  with 
a  capital  of  twenty-five  thousand  dollars,  a  considerable  number 
of  banks  of  this  class  have  been  organized  and  many  of  them  were 
converted  State  institutions,  or  reorganized  State  or  private 
banks.  Before  their  admission  to  the  national  system,  many  of 
them  had  been  accustomed  to  making  loans  upon  the  security  of 
real  estate,  and  when  they  became  national  associations  they  nat- 
urally felt  the  restraint  of  the  law  prohibiting  such  loans.  They 
were  induced  to  nationalize  in  the  first  place  because  of  the 
greater  advantages  which  they  thought  the  national  system  af- 


ROMANCE  AND  TRAGEDY  OF  BANKING  87 

forded  over  state  and  private  banks.  At  the  same  time,  while 
reaping  whatever  benefits  were  to  be  derived  from  incorporation 
under  national  authority,  they  desired  to  continue  the  business  of 
making  loans  on  mortgage  security  and  to  exercise  other  powers 
not  permitted  by  the  national  banking  laws. 

Many  national  bankers  do  not  regard  real  estate  mortgage 
loans  with  favor,  and  will  not  avail  themselves  of  the  privilege  of 
making  such  loans,  now  that  they  are  permitted  by  law  to  a  lim- 
ited extent.  The  demand  for  such  a  privilege  did  not,  therefore, 
come  from  this  class  of  bankers. 

Of  all  the  banks  in  the  national  system,  it  is  most  essential 
that  the  very  banks  that  were  most  clamorous  for  the  privilege 
of  making  real  estate  loans  should  keep  their  assets  in  a  quickly 
convertible  form. 

Under  the  national  banking  laws  banks  have  been  permitted 
to  take  real  estate  mortgages  to  prevent  loss  on  debts  previously 
contracted  in  good  faith,  and  to  acquire  title  to  the  property,  if 
necessary,  in  satisfaction  of  debts,  but  the  statute  requires  that 
realty  so  acquired  shall  be  disposed  of  within  five  years.  Banks 
have  found  it  very  difficult  in  the  past  to  dispose  of  real  estate 
within  the  limit  of  time  prescribed  by  the  statute  without  incur- 
ring considerable  loss.  The  result  is  that  more  or  less  realty  of 
an  unproductive  character  accumulates  on  their  hands. 

If,  therefore,  under  the  limited  privileges  above  referred  to, 
banks  have  accumulated  so  much  real  estate  during  the  course  of 
their  existence  and  have  found  it  so  difficult  to  realize  on  mort- 
gage loans,  or  to  dispose  of  either  the  realty  or  the  mortgages, 
is  there  not  great  danger  that  in  permitting  loans  to  be  made 
directly  upon  real  estate  security  the  amount  invested  in  such 
loans,  and  the  realty  that  will  be  taken  in  addition  thereto  as 
security  for  or  in  satisfaction  of  bad  debts,  will  absorb  and  tie 
up  such  a  large  proportion  of  deposits  in  this  inconvertible  forjrn 
as  to  bring  about  a  similar  condition  of  affairs  in  many  banks  as 
existed  in  the  Freed  man's  Savings  and  Trust  Company,  and  with 
like  results. 

Notwithstanding  the  experiences  of  the  past,  many  national 
bankers  who  favor  real  estate  loans  claim  that  real  estate  mort- 
gages are  the  very  best  security  to  be  obtained  in  their  respective 


88  ROMANCE  AND  TRAGEDY  OF  BANKING 

localities,  and  are  eminently  better  than  stocks,  bonds  or  com- 
mercial paper.  In  some  sections  of  the  country  this  may  be,  and 
no  doubt  is  true,  provided  such  loans  are  limited  to  a  safe  per- 
centage of  the  actual  value  of  the  real  estate  mortgaged,  and 
restricted  in  the  total  amount  of  such  loans.  But  in  other  locali- 
ties the  reverse  would  be  the  case.  In  sections  of  the  country 
where  the  actual  value  of  farm  lands  is  unsettled  and  more  or  less 
speculative,  mortgage  loans  will  be  the  very  worst  kind  of  an 
investment  for  banks  to  make. 

The  persistent  pressure  upon  the  Comptroller's  office  before 
the  passage  of  the  Federal  Reserve  Act  for  a  more  liberal  inter- 
pretation of  the  law  in  respect  to  real  estate  loans,  also  had  its 
effect  in  later  years,  and  through  liberal  administrative  rulings 
based  upon  strained  interpi'etation  of  the  statutes  many  loans 
were  permitted  to  be  made  upon  real  estate  mortgages  by  indirect 
methods  which  formerly  were  held  to  be  unlawful. 

Interpretation  of  the  Banking  Laws 

The  rule  laid  down  by  the  Supreme  Court  of  the  United  States 
for  interpreting  the  national  banking  laws  is,  that  "the  intent, 
not  the  letter  of  the  statute,  constitutes  the  law."  The  same 
court  has  also  held  that  "while  Section  5136,  United  States  Re- 
vised Statutes,  does  not  in  plain  terms  prohibit  a  loan  on  real 
estate,  the  implication  to  that  effect  is  clear,  and  what  is  implied 
is  as  effectual  as  if  it  were  expressed." 

It  cannot  be  disputed  that  the  intent  of  the  National  Bank 
Act  of  1864  was  to  prohibit  loans  being  made  upon  the  security 
of  real  estate  mortgages,  and  as  the  courts  have  declared  that 
what  a  bank  is  prohibited  from  doing  directly  it  cannot  lawfully 
do  indirectly,  it  follows  that  when  real  estate  loans  were  made  in- 
directly in  a  form  to  evade  or  circumvent  the  restrictions  of  the 
statute,  they  were  as  much  in  contravention  of  law  as  if  made 
directly,  and  no  administrative  ruling  or  distorted  interpretation 
of  the  law  can  legalize  an  unlawful  transaction. 

The  question  of  good  faith  enters  largely  into  all  transactions 
involving  loans  indirectly  secured  by  liens  on  realty,  and  the  facts, 


ROMANCE  AND  TRAGEDY  OF  BANKING  89 

not  the  form  of  the  transactions,    determine    their    legality    or 

illegality. 

Examinations  of  national  banks  and  supervision  by  the  Comp- 
troller of  the  Currency  should  be  as  practical  as  possible,  and 
practical  experience  as  to  the  numerous  subterfuges  resorted  to 
bv  banks  to  circumvent  the  law  in  respect  to  real  estate  loans,  is 
a  safer  guide  for  the  examiner  and  Comptroller  to  follow  in  deter- 
mining the  good  faith  of  a  transaction  than  legal  theorizing, 
which,  while  usually  following  the  letter  of  the  statute,  generally 
loses  sight  of  its  intent  or  spirit. 

Especially  is  this  true  in  the  light  of  the  fact  that  it  has  been 
impossible  to  obtain  a  unanimous  opinion  of  an  Appellate  Court 
upon  anv  question  involving  an  interpretation  of  the  old  provision 
of  the  national  banking  law  in  regard  to  real  estate  loans  even  by 
so  eminent  a  body  of  jurists  as  composes  the  Supreme  Court  of 
the  United  States,  which  upon  this  very  question  rendered  a 
divided  opinion. 

Until  the  position  of  the  Comptroller's  office  on  this  subject 
was  amended  in  later  years  to  conform  to  the  views  of  bankers 
who  desired  to  make  real  estate  loans,  it  was  held,  and  very  prop- 
erly so,  that  it  was  unlawful  for  a  bank  to  purchase  or  discount 
a  real  estate  mortgage  note,  even  though  the  mortgage  did  not 
run  directly  to  the  bank  and  the  endorser  or  assignor  of  the  note 
was  alleged  to  be  financially  responsible  for  the  loan  without  re- 
course to  the  mortgage. 

In  other  words,  a  note  in  this  form  was  held  to  be  simply  two- 
name  paper  secured  by  collateral,  the  collateral  being  the  real 
estate  mortgage.  The  owner  of  the  note,  in  the  event  of  non- 
payment by  the  maker  at  maturity,  could  proceed  to  collect  the 
loan  from  the  endorser,  or  convert  the  security  by  foreclosure. 
In  many  cases  of  this  kind  the  latter  course  was  necessary,  as 
the  endorser  of  the  note  was  frequently  financially  irresponsible, 
and  the  bank  knew  it  at  the  time  the  loan  was  made  and  would 
not  have  made  it  but  for  the  mortgage  security  back  of  the  note. 

While  this  question  never  has  been  directly  before  the  courts, 
there  is  sufficient  authority  in  support  of  the  position  that  the 
assignment  of  a  mortgage  note  carries  with  it  an  assignment  of 
the  mortgage,  to  be  found  in  the  dictum  of  the  courts.  In  the 


90  ROMANCE  AND  TRAGEDY  OF  BANKING 

case  of  the  First  National  Bank  of  Mankato  v.  Pope  et  al,  the 
Supreme  Court  of  Minnesota  held  that  where  a  promissory  note 
secured  by  a  mortgage  on  real  estate  is  endorsed  and  transferred 
to  a  purchaser  without  formal  assignment  of  the  morgage,  the 
security  follows  the  note  as  an  incident  thereto,  and  the  purchaser 
becomes  the  equitable  owner  of  the  mortgage,  acquiring  an  inter- 
est which  enables  him  to  deal  with  it  for  all  purposes. 

Ranking  Conducted  on  Widely  Different  Lines  Than  Formerly 

Banking  today  is  conducted  upon  widely  different  lines  to 
what  it  was  when  the  Bank  Act  of  1864  was  enacted,  and  the  law 
has  not  kept  pace  with  the  constantly  changing  conditions.  Com- 
petition with  trust  companies  and  other  banking  institutions  op- 
erating under  State  authority,  more  liberal  in  the  scope  of  cor- 
porate powers  conferred,  forced  many  competing  national  asso- 
ciations doing  business  in  the  same  locality  into  undertakings  not 
contemplated  by  the  national  banking  laws  and  foreign  to  the 
legitimate  functions  of  a  commercial  bank.  The  powers  conferred 
upon  trust  companies  and  savings  banks  to  make  loans  upon  real 
estate  security,  induced  many  national  associations  to  make  loans 
upon  like  security  by  resorting  to  indirect  methods  to  evade  the 
restrictions  of  the  statute.  This  was  particularly  true  of  locali- 
ties where  mortgage  loans  were  the  principal  securities  dealt  in 
by  savings  banks  and  trust  companies. 

While  the  national  banking  laws  should  be  construed  as 
broadly  and  as  liberally  as  is  possible  consistent  with  the  intent 
and  spirit  of  the  statutes,  it  is  the  sworn  duty  of  an  administra- 
tive officer  to  enforce  an  observance  of  the  law  as  it  exists  and 
not  endeavor  to  twist  it  out  of  shape  either  to  meet  his  own  views 
or  the  wishes  of  bankers  as  to  what  it  should  be. 

Unfortunately  there  has  been  too  much  of  a  disposition  in 
later  years  in  the  administration  of  the  Currency  Bureau  to 
change  existing  law  by  administrative  regulations  or  rulings,  un- 
warranted by  any  reasonable  construction  of  the  statutes,  to  meet 
the  demands  incident  to  competition  between  national  and  State 
institutions.  In  no  respect  was  this  fact  more  patent  than  in  its 
application  to  real  estate  loans.  Official  rulings  in  this  connec- 


ROMANCE  AND  TRAGEDY  OF  BANKING     91 

tion  practically  nullified  the  prohibitive  provisions  of  the  statutes 
and  conferred  upon  the  banks  privileges  which  had  been  denied 
them,  up  to  that  time,  by  Congress  since  1864. 

Under  such  interpretations  of  the  law,  the  bar  to  real  estate 
loans  was  removed,  and  indirect  methods  of  circumventing  the 
statutes  were  recognized  as  legitimate,  notwithstanding  the  dec- 
laration of  the  Supreme  Court  of  the  United  States  that  what  a 
bank  is  prohibited  from  doing  directly  it  cannot  lawfully  do  in- 
directly. 

National  Bank  Failures 

During  the  twelve  years  that  Mr.  Knox  presided  over  the 
affairs  of  the  Currency  Bureau,  there  were  seventy-three  national 
bank  failures.  The  largest  of  these  was  the  National  Bank  of  the 
State  of  Missouri  at  St.  Louis. 

This  bank  had  a  capital  of  $2,500,000.  Its  total  liabilities 
at  the  time  of  failure  were  about  $5,400,000.  It  was  chartered 
in  October,  1866,  and  was  placed  in  the  hands  of  a  receiver 
June  23,  1877.  The  cause  of  its  failure  was  fraudulent  manage- 
ment, excessive  loans  to  its  officers  and  directors,  and  deprecia- 
tion of  securities.  There  was  collected  by  the  receiver  from  its 
assets  $2,846,622,  and  from  its  stockholders  by  assessment 
$245,108,  of  which  amount  there  was  returned  to  the  shareholders 
in  cash  $26,720,  and  the  depositors  and  other  creditors  were  paid 
one  hundred  per  cent,  of  their  claims  with  interest.  The  receiver- 
ship was  finally  closed  March  26,  1888. 

In  commenting  upon  this  and  other  failures  of  that  year,  Mr. 
Knox,  in  his  annual  report  for  1877,  stated  that  the  most  fruitful 
cause  of  bank  failures  was  the  unlawful  use  of  the  funds  or  credits 
of  these  associations  by  their  officers  and  directors,  and  that  in 
most  instances  this  was  accomplished  through  malfeasance  or 
crime  by  the  discount  of  notes  in  which  the  bank  had  no  interest. 

He  therefore  recommended  in  this  connection  the  passage  of 
an  Act  prohibiting  a  bank  from  borrowing  money  upon  its  own 
obligations,  or  from  lending  its  credit,  and  also  from  obtaining 
rediscounts  upon  its  bills  receivable,  unless  specifically  authorized 
by  resolution  of  its  board  of  directors,  under  the  seal  of  the  bank. 


92  ROMANCE  AND  TRAGEDY  OF  BANKING 

This,  lie  thought,  would  have  the  effect  of  putting  other  banks 
upon  their  guard  when  applied  to  for  such  favors. 

The  National  Bank  of  the  State  of  Missouri  was  the  successor 
of  the  Missouri  State  Bank,  which  was  chartered  in  1857  with  an 
authorized  capital  of  $5,000,000  and  was  converted  into  a 
national  association  on  October  31,  1866. 

The  manner  in  which  this  old  and  reputable  institution  was 
converted  into  a  National  bank  and  subsequently  wiped  out  of 
existence  by  the  wrecking  of  the  latter  association  will  prove  inter- 
esting reading. 

It  appears  from  the  published  history  of  this  case  that  in 
1857,  when  the  Missouri  State  Bank  was  chartered,  the  State- 
subscribed  for  $1,000,000  of  the  capital  stock  and  issued  bonds 
in  payment  therefor.  The  stock  was  also  distributed  among  indi- 
vidual subscribers  and  was  later  increased  to  $3,500,000,  making 
the  institution  the  largest  bank  in  point  of  capital  stock  and  tho 
leading  bank  west  of  the  Allegheny  Mountains  at  that  time. 

An  Act  of  the  State  Legislature  was  passed  in  1866  author- 
izing the  Governor  to  receive  proposals  for  the  purchase  of  the 
State's  interest  in  the  bank,  and  State  bonds  were  authorized  to 
be  received  in  payment  for  the  stock.  The  market  value  of  these 
bonds  at  that  time  was  about  seventy  cents  on  the  dollar,  with 
four  years'  accrued  interest.  The  Act  required  the  proceeds  of 
the  sale  of  the  bank  stock  to  be  reserved  as  a  permanent  State 
school  fund. 

The  bids  for  the  purchase  of  the  stock  were  opened  by  a  Com- 
missioner at  the  Planters'  House  in  St.  Louis,  in  November,  1866. 
There  were  only  two  proposals  received  for  the  stock,  and  one 
of  these  was  from  Robert  A.  Barnes,  president  of  the  bank.  The 
other  bidder  was  James  B.  Eads.  The  market  value  of  the  stock 
at  this  time  had  been  depreciated  to  about  sixty-five  dollars  a 
share  of  the  par  value  of  one  hundred  dollars.  At  the  time  of 
the  sale,  the  State  owned  about  10,863  shares  of  the  stock  of  the 
bank.  Owing  to  some  alleged  irregularity  in  regard  to  the  pro- 
posals, the  bid  of  Eads  was  accepted,  although  it  was  said  that 
Barnes  was  ready  to  pay  more  for  the  stock  than  Eads  offered 
for  it.  Eads,  it  appears,  represented  a  pool  that  had  been  formed 
for  the  purchase  of  the  stock,  but  not  having  the  funds  to  pay 


ROMANCE  AND  TRAGEDY  OF  BANKING  93 

for  it  the  pool  borrowed  State  bonds  from  various  parties  with 
which  to  exchange  for  the  stock,  as  authorized  by  the  Act  of  the 
Legislature.  The  largest  amount  of  these  bonds  was  borrowed 
from  the  Bank  of  Commerce  of  New  York  City.  These  bonds 
were  borrowed  for  a  period  long  enough  to  enable  the  pool  to 
make  the  arrangements  necessary  for  the  conversion  of  the  State 
bank  into  a  national  association  and  to  elect  themselves  directors 
of  the  latter  institution. 

Upon  securing  a  charter  for  the  national  association,  they 
immediately  opened  negotiations  with  the  Bank  of  Commerce  of 
New  York  for  a  loan  of  a  sufficient  amount  to  enable  them  to  pay 
for  the  bonds  which  they  had  borrowed  to  make  payment  to  the 
State  for  the  stock,  and  to  carry  the  indebtedness  thereby  in- 
curred as  long  as  they  desired,  agreeing  at  the  same  time  to  retain 
control  and  possession  of  the  management  of  the  National  Bank 
of  the  State  of  Missouri.  These  negotiations  were  begun  prior 
to  the  purchase  of  the  stock  from  the  State,  but  did  not  take 
active  form  until  after  the  purchase  was  completed.  The  price 
paid  by  the  Eads  pool  for  the  bank  stock  owned  by  the  State  was 
$108.50  per  share. 

During  the  time  the  Bank  of  Commerce  was  engaged  in  aid- 
ing the  pool  in  the  purchase  of  the  bonds  with  which  to  make 
payment  to  the  State,  A.  R.  Barnes,  then  president  of  the  State 
Bank  of  Missouri,  employed  the  Bank  of  Commerce  to  procure 
bonds  for  him  to  enable  the  State  Bank  to  become  the  purchaser 
of  the  10,863  shares  of  stock  that  the  State  owned.  The  Bank 
of  Commerce  undertook  to  procure  the  bonds  for  Barnes,  but  it 
appears  said  nothing  to  him  concerning  the  negotiations  of  tho 
Eads  pool  for  the  same  purpose.  At  this  time,  Eads  and  his 
associates  had  no  connection  with  the  Bank  of  the  State  of  Mis- 
souri officially. 

On  September  26,  1866,  before  Eads  and  the  pool  had  any 
official  connection  with  the  bank,  and  before  that  institution  had 
become  a  national  bank,  the  pool  applied  to  the  Bank  of  Com 
merce  for  a  loan  to  the  State  Bank  of  Missouri  of  $1,000,000. 
The  Bank  of  Commerce  accepted  the  proposition  in  a  resolution 
unanimously  passed  by  its  board  of  directors,  although  Mr. 


94  ROMANCE  AND  TRAGEDY  OF  BANKING 

Eads  presented  no  credentials  whatever  from  the  State  Bank  of 
Missouri  showing  his  authority  to  negotiate  a  loan  for  that  bank. 

The  State  Bank  was  converted  into  the  National  Bank  of 
the  State  of  Missouri  on  October  30,  1866,  and  the  seven  mem- 
bers of  the  Eads  pool  became  the  sole  directors  of  the  national 
association.  In  December  following,  the  proposed  loan,  although 
alleged  to  be  exclusively  for  the  personal  use  of  the  seven  direc- 
tors, was  contracted  for  in  the  name  of  the  national  bank,  with 
the  seven  directors  as  sureties  for  the  bank. 

This  money,  it  was  charged,  was  appropriated  by  the  pool  on 
receipt,  and  the  bank  never  had  the  use  of  a  dollar  of  it.  The 
loan,  it  is  reported,  was  kept  standing  for  eleven  years,  and  in- 
terest at  the  rate  of  three  per  cent,  was  paid  by  the  pool  from 
the  dividends  on  their  million  dollars'  worth  of  stock. 

The  largest  part  of  this  loan  was  repaid  to  the  Bank  of  Com- 
merce, but  at  the  time  of  the  failure  of  the  National  Bank  of  the 
State  of  Missouri,  there  remained  due  a  balance  of  $413,750,  in- 
cluding interest  up  to  the  date  of  settlement,  less  $94,121.71  due 
from  the  Bank  of  Commerce,  which  had  in  the  meantime  also 
been  converted  into  a  national  association  under  the  title  of  the 
National  Bank  of  Commerce.  A  suit  was  instituted  by  the  latter 
bank  in  the  United  States  District  Court  at  St.  Louis,  for  the  re- 
covery of  this  balance,  and  judgment  was  awarded  the  plaintiff 
for  the  sum  of  something  like  $445,518,  by  direction  of  the  pre- 
siding judge,  who  held  that  the  evidence  clearl}7  showed  that  the 
$1,000,000  was  borrowed  by  the  Eads  pool  for  the  Bank  of  Mis- 
souri and  subsequently  loaned  to  the  directors  of  the  bank  after 
its  conversion  into  a  national  association,  and  that  he  could  see 
no  basis  in  the  evidence  which  would  justify  the  jury  in  finding 
that  the  plaintiff  bank  knew  that  the  directors  of  the  defendant 
bank  intended  to  make  any  fraudulent  use  or  disposition  of  the 
money.  He  stated  further  that  if  the  jury  were  to  find  to  the 
contrary  that  he  would  deem  it  his  duty  to  set  aside  their  verdict, 
and  he  therefore  instructed  them  to  find  a  verdict  for  the  plaintiff. 

In  the  course  of  the  arguments  by  the  defendant's  counsel, 
the  judge  expressed  the  view  that  it  would  have  been  a  very  wise 
provision  for  Congress  to  have  inserted  in  the  law  a  section  pro- 
hibiting banks  from  borrowing  money  at  interest  for  the  purpose 


ROMANCE  AND  TRAGEDY  OF  BANKING  95 

of  relending,  as  no  bank  doing  business  on  that  principle  was  a 
safe  institution. 

The  receiver  of  the  failed  National  Bank  of  Missouri  took  an 
appeal  of  this  case  to  the  Supreme  Court  of  the  United  States, 
but  the  appeal  never  was  heard,  as  the  claim  of  the  National 
Bank  of  Commerce  was  compromised  by  the  payment  by  the  re- 
ceiver of  the  sum  of  $200,000,  Mr.  Eads  contributing  $50,000  of 
this  amount. 

The  other  complications  which  contributed  toward  the  failure 
of  this  bank  were  the  general  stagnation  in  business,  the  shrinkage 
in  value  of  all  kinds  of  securities,  the  large  and  unlawful  advances 
to  enterprises  in  which  some  of  the  directors  were  interested,  in- 
cluding bridge  and  jetty  constructions  and  injudicious  manage- 
ment generally.  At  the  time  of  the  failure,  the  City  of  St.  Louis 
had  on  deposit  in  the  bank  over  $257,953. 

About  six  weeks  before  the  failure,  the  bank  was  examined  by 
a  special  examiner  from  Washington,  and  as  a  result  several 
changes  were  made  in  the  board  of  directors.  At  the  first  meet- 
ing of  the  board  after  its  reorganization  a  thorough  examination 
into  the  condition  of  the  association  was  made,  under  the  super- 
vision of  the  new  board,  on  the  completion  of  which  it  was  unani- 
mously voted  to  close  the  bank  and  wind  up  its  affairs. 

Several  months  after  the  suspension  of  the  bank  and  the  ap- 
pointment of  a  receiver,  the  Federal  Grand  Jury  being  in  session 
in  St.  Louis,  a  resolution  was  adopted  by  the  jury  requesting  the 
United  States  Attorney  to  make  an  investigation  of  alleged  crimi- 
nal violations  of  law  by  the  officers  of  this  bank. 

The  United  States  Attorney  advised  the  jury  that  the  affairs 
of  the  bank  had  then  been  in  the  hands  of  the  Comptroller  of  the 
Currency  for  eighteen  months  and  if  any  criminal  violations  of 
law  had  been  discovered  in  the  management  of  the  institution  the 
receiver  and  the  Comptroller  were  doubtless  aware  of  the  fact, 
and  that  until  complaint  was  made  by  them,  or  either  of  them, 
he  did  not  feel  warranted  in  taking  any  steps  toward  an  investi- 
gation. 

In  December,  1878,  two  creditors  of  the  failed  bank  called  at 
the  office  of  the  United  States  Attorney  and  made  complaint 
against  the  president  of  the  bank,  charging  him  with  criminal 


<J6  ROMANCE  AND  TRAGEDY  OF  BANKING 

misapplication  of  the  funds  of  the  association.  These  charges 
were  made  in  writing  under  oath.  The  United  States  Attorney 
then  applied  to  the  court  for  a  subpoena  duces  tecum  directing 
the  receiver  to  appear  before  the  grand  jury  with  the  books  of 
the  bank.  An  investigation  was  then  begun,  which  lasted  about 
forty-seven  days,  and  resulted  in  the  indictment  of  the  president, 
vice-president  and  cashier  of  the  bank,  based  upon  the  testimony 
developed.  Subsequently  other  indictments,  based  upon  addi- 
tional evidence,  were  found  against  these  parties. 

Charges  Preferred  Against  Mr.  Knox  by  the  United  States 

Attorney 

In  October,  1879,  the  United  States  Attorney  preferred 
charges  to  the  Department  of  Justice  at  Washington  against  the 
Comptroller  of  the  Currency,  John  Jay  Knox,  alleging  that  al- 
though the  bank  had  been  in  the  hands  of  a  receiver  for  eighteen 
months,  neither  the  Comptroller  nor  the  receiver  had  aided  in  or 
encouraged  the  prosecution  of  the  officers  in  any  way,  except  to 
furnish  him,  upon  application,  such  records  and  information  as 
he  called  for. 

He  charged  that  neither  the  receiver  nor  the  Comptroller  had 
denied  the  guilt  of  the  defendants,  and  that  the  Comptroller  in 
his  testimony  before  the  grand  jury  pronounced  certain  entries 
in  the  bank's  books  upon  which  indictments  were  based,  to  be 
materially  false  entries,  and  that  certain  reports  of  condition 
that  were  sworn  to  by  the  cashier  were  false  reports.  In  explana- 
tion of  why  he  had  not  reported  such  violations  of  law  to  the 
United  States  Attorney,  he  quoted  the  Comptroller  as  stating 
that  the  usage  of  his  office  was  when  officers  or  directors  were 
charged  with  criminal  violations  of  law  to  endeavor  in  the  first 
place  to  collect  what  could  be  collected  from  them,  and  having 
done  that  to  inform  the  Solicitor  of  the  Treasury  or  the  Attorney 
General  of  the  facts  in  connection  with  any  criminal  violations 
of  law  by  such  officers  for  such  action  as  they,  or  either  of  them, 
should  determine. 

The  District  Attorney  contended  that  such  a  policy  on  the 
part  of  the  Comptroller  was  not  consistent  with  his  plain  duty 


ROMANCE  AND  TRAGEDY  OF  BANKING  97 

as  a  public  officer.  He  assumes,  he  said,  the  right  to  retain  con- 
trol of  the  question  of  prosecution  until  he  has  exhausted  the 
pecuniary  resources  of  the  offenders  and  then  to  simply  report 
the  facts  to  the  Department  of  Justice  for  its  action.  He  stated 
further  that  the  Comptroller  of  the  Currency  is  charged  with  the 
execution  of  all  laws  and  regulations  relating  to  national  banks. 
These  laws,  he  said,  define  and  denote  what  are  criminal  violations 
of  law,  and  that  it  is  the  Comptroller's  duty  under  his  oath  of 
office  not  only  to  report  all  such  violations  of  law  to  the  Depart- 
ment of  Justice  as  soon  as  they  come  to  his  knowledge,  but  to 
voluntarily  give  the  moral  and  substantial  aid  of  his  bureau  to 
the  prosecution  of  the  offenders.  He  contended  that  the  Comp- 
troller has  no  right  to  withhold  the  facts  until  the  statute  of  limi- 
tations intervened  to  prevent  prosecution,  nor  for  a  single  day 
for  the  purpose  of  realizing  on  pecuniary  demands  for  the  benefit 
of  creditors  of  the  bank.  He  held  that  it  was  of  far  greater  im- 
portance that  offenders  against  the  law  should  meet  with  almost 
certain  punishment  that  attends  prompt  and  vigorous  prosecu- 
tion of  crime  than  that  the  creditors  of  the  bank  should  receive 
an  increased  percentage  of  dividends. 

He  charged  that  no  report  was  made,  or  even  contemplated, 
to  either  the  Solicitor  of  the  Treasury  or  the  Attorney  General, 
and  that  by  reason  of  such  neglect  the  statute  of  limitations  had 
barred  prosecution  of  some  of  the  most  flagrant  violations  of  law 
in  this  case,  some  of  which,  he  said,  were  known  to  the  Comp- 
troller's office  for  months  before  the  bank  was  closed.  He  declared 
that  through  the  grossest  frauds  and  criminal  mismanagement 
the  bank  had  been  insolvent  for  years,  and  that  the  cashier,  al- 
though under  indictment,  had  been  employed  and  retained  by  the 
receiver,  with  the  knowledge  of  the  Comptroller,  as  the  principal 
assistant  to  the  former,  at  a  salary  of  three  thousand  dollars  a 
year,  in  charge  of  the  very  books  which  contained  the  evidence 
against  him  and  his  indicted  associates. 

He  also  complained  that  in  the  compromise  of  the  claim  of 
the  National  Bank  of  Commerce,  the  receiver  had  surrendered 
notes  which  were  material  to  a  successful  prosecution  of  the  in- 
dicted officers,  and  that  the  legal  adviser  of  the  receiver  was  the 
leading  attorney  for  the  defendants  in  the  criminal  cases,  and 


98  ROMANCE  AND  TRAGEDY  OF  BANKING 

charged  the  Comptroller  with  apparently  being  in  league  with 
the  offenders  arrayed  against  the  Government  in  its  efforts  to 
bring  them  to  justice. 

The  United  States  Attorney  concluded  his  charges  against 
the  Comptroller  with  the  statement  that  if  he  could  not  give  his 
official  support  to  the  prosecution  of  the  cases  against  the  bank 
officers,  the  Department  of  Justice  should  know  the  reason  why, 
and  he  desired  that  his  communication  to  the  Attorney  General 
be  regarded  as  a  formal  complaint  against  the  Comptroller  and 
receiver,  and  that  it  be  submitted  to  the  Secretary  of  the  Treas- 
ury, with  such  comments  as  the  Attorney  General  might  deem 
proper. 

The  charges  of  the  United  States  Attorney  were  referred  to 
the  Secretary  of  the  Treasury,  Hon.  John  Sherman,  who  in  turn 
referred  them  to  Comptroller  Knox,  with  a  request  for  a  report 
thereon. 

Mr.  Knox's  Reply  to  United  States  Attorney's  Charges 

Under  date  of  October  29,  1879,  Mr.  Knox  made  a  full  and 
detailed  reply  to  the  charges  of  the  United  States  Attorney  and 
enclosed  with  it  a  report  from  the  receiver  of  the  bank,  to  whom 
he  had  referred  that  part  of  the  United  States  Attorney's  com- 
munication relating  to  his  administration  of  the  trust  and  course 
of  action,  answering  seriatim  every  allegation  made  by  the  United 
States  Attorney. 

In  his  reply  Mr.  Knox  severely  censured  the  United  States 
Attorney  for  giving  the  public  press  a  copy  of  his  charges,  which, 
he  said,  in  some  instances  were  published  with  conspicuous  head- 
lines, attributing  to  him  the  grossest  official  negligence  and  mal- 
feasance in  office,  without  first  giving  him  an  opportunity  to  make 
answer.  He  stated  that  between  the  date  that  he  appeared  before 
the  grand  jury  and  the  date  of  the  United  States  Attorney's  com- 
munication, a  period  of  ten  months,  the  latter  had  never  made 
any  complaint  to  his  official  superiors  as  to  the  Comptroller's  or 
the  receiver's  official  conduct  in  connection  with  the  affairs  of  the 
defunct  bank,  and  that  as  no  request  was  received  from  the  United 
States  Attorney  for  official  action,  or  for  information,  that  was 


ROMANCE  AND  TRAGEDY  OF  BANKING  99 

for  a  moment  neglected  or  denied  by  either  him  or  the  receiver,  he 
had  no  cause  to  suspect  that  he  was  the  subject  of  the  United 
States  Attorney's  malevolence  or  the  hostility  displayed  by  his 
communication  and  its  publication. 

Mr.  Knox  then  stated  that  the  only  formal  complaint  made 
by  the  United  States  Attorney,  in  intelligible  and  unambiguous 
terms,  concerning  his  actions  in  relation  to  the  criminal  proceed- 
ings referred  to,  appeared  to  be  that  he  had  misunderstood  or 
failed  to  obey  the  public  statutes  which  define  the  Comptroller's 
duties,  and  that  he  was  not  in  sympathy  with  the  public  prose- 
cutor in  his  efforts  to  bring  to  justice  the  violators  of  the  national 
banking  laws.  Even  these  charges,  he  said,  were  made  by  indi- 
rection and  innuendo  rather  than  by  any  specific  allegations.  But, 
whether  made  by  vague  intimations  or  definitely  alleged,  Mr. 
Knox  declared  the  charges  to  be  maliciously  false,  and  that  he 
believed  them  to  have  been  made  by  the  United  States  Attorney, 
not  from  any  sense  of  public  duty,  but  to  subserve  personal  and 
unworthy  motives  and  purposes.  So  far  as  the  charges  related 
to  himself,  Mr.  Knox  stated,  he  knew  them  to  be  false.  So  far  as 
they  related  to  the  receiver,  he  believed  them  to  be  false,  and  that 
their  falsity  was  plainly  apparent  by  the  records  of  the  Comp- 
troller's Bureau,  and  by  the  public  history  of  the  transactions  in 
question. 

Mr.  Knox  then  proceeded  to  review  the  condition  of  the  bank 
immediately  preceding  its  failure,  and  the  action  of  the  Comp- 
troller's office  in  connection  therewith.  He  stated  that  upon  re- 
ceiving the  report  of  the  special  examiner,  which  disclosed  a  seri- 
ous impairment  of  the  capital  of  the  association,  he  at  once 
directed  a  reorganization  of  the  board  of  directors  and  a  correc- 
tion of  the  unsatisfactory  matters  which  he  called  to  their 
attention. 

After  weeks  of  searching  investigation  into  the  condition  of 
the  bank  the  reorganized  board  of  directors,  one  of  whom  was 
Hon.  John  B.  Henderson,  ex-United  States  Senator,  and  a  promi- 
nent attorney  and  citizen  of  St.  Louis,  informed  the  Comptroller 
that  the  bank  was  insolvent.  He  thereupon  appointed  Walter  S. 
Johnston  receiver,  who  proceeded  to  wind  up  the  affairs  of  the 
institution  with  noticeable  vigor  and  success. 


100  ROMANCE  AND  TRAGEDY  OF  BANKING 

Mr.  Knox  then  went  on  to  state  that  on  December  14,  1878, 
in  compliance  with  the  request  of  the  United  States  Attorney,  he 
sent  him  all  the  reports  of  condition  of  the  bank  and  the  oaths 
of  directors  and  instructed  the  receiver  to  give  him  a  copy  of  the 
report  of  the  bank  examiner,  which  was  then  in  the  receiver's  pos- 
session, and  on  December  27,  1878,  he  appeared  himself  before 
the  grand  jury  at  St.  Louis,  in  compliance  with  the  United  States 
Attorney's  request.  As  a  result  of  the  hearing  the  president, 
vice-president  and  the  cashier  of  the  bank  were  indicted.  At  a 
later  date,  another  grand  jury  made  an  investigation  of  the 
affairs  of  the  bank,  and  that  grand  jury,  too,  was  furnished  with 
all  the  information  in  possession  of  the  Bureau  and  the  receiver 
bearing  on  the  case. 

From  the  date  of  the  last  investigation  to  the  date  of  receipt 
of  the  United  States  Attorney's  complaint  to  the  Attorney  Gen- 
eral, Mr.  Knox  stated,  the  United  States  Attorney  never  sought 
his  advice  or  gave  him  any  information  concerning  the  criminal 
prosecutions,  nor  did  he  make  application  to  him  or  to  the  re- 
ceiver for  any  action,  aid  or  sympathy  in  his  proceedings  against 
the  accused,  although  he  was  always  willing  and  ready  to  co- 
operate with  him  and  to  place  at  his  disposal  any  information  or 
records  in  possession  of  the  Bureau. 

In  considering  the  complaints  made  by  the  United  States  At- 
torney relating  to  occurrences  subsequent  to  the  finding  of  the 
indictments,  Mr.  Knox  said  that  although  a  year  had  elapsed 
after  the  indictments  were  found,  the  accused  had  not  yet  been 
brought  to  trial. 

In  explanation  of  the  United  States  Attorney's  imputation 
that  the  action  of  Mr.  Knox  in  accepting  payment  from  Mr.  Eads 
in  settlement  of  his  indebtedness  to  the  bank  and  surrendering  to 
him  the  evidence  of  his  indebtedness,  injuriously  affected  the  in- 
terests of  the  prosecution,  Mr.  Knox  stated  that  he  accepted  from 
Mr.  Eads,  under  an  order  of  a  competent  court,  a  large  sum  of 
money  in  full  satisfaction  of  his  indebtedness  to  the  bank,  believ- 
ing the  settlement  to  be  of  vital  importance  to  the  interests  of  the 
creditors  of  the  association,  and  in  doing  so  he  did  not  condone 
any  infractions  of  the  law  nor  deprive  the  prosecution  of  any 
evidence  which  the  District  Attorney  intended  or  desired  to  use. 


ROMANCE  AND  TRAGEDY  OF  BANKING  101 

In  regard  to  the  United  States  Attorney's  complaint  that  the 
receiver  of  the  bank  retained  in  his  employ  the  late  cashier,  after 
his  indictment,  and  that  he  retained  as  his  counsel  ex-Senator 
Henderson,  a  director  of  the  bank,  who  was  also  the  counsel  for 
one  of  the  defendants,  Mr.  Knox  stated  that  he  had  no  knowledge 
of  these  facts  until  he  read  the  complaint  of  the  United  States 
Attorney,  and  he  expressed  the  opinion  that  if  the  United  States 
Attorney  sincerely  thought  that  the  employment  of  these  persons 
by  the  receiver  was  detrimental  to  the  interests  of  the  prosecu- 
tion, it  was  his  duty  to  have  so  advised  the  Comptroller,  but  that 
his  failure  to  do  so,  justified  the  inference  that  he  made  these 
accusations  and  gave  publicity  to  them  merely  to  subserve  his 
own  interests.  He  then  quoted  from  the  receiver's  letter  his  rea- 
sons for  employing,  and  continuing  in  his  employ,  the  parties 
referred  to. 

Mr.  Knox  denied  that  the  criminal  sections  of  the  national 
banking  laws  imposed  any  duties  whatever  upon  the  Comptroller 
of  the  Currency,  but  that  it  was  the  duty  of  the  United  States 
Attorney  to  prosecute  in  his  district  all  delinquents  for  crimes 
and  offenses  cognizable  under  the  authority  of  the  United  States. 
Notwithstanding  this  fact,  however,  he  was  and  always  had  been 
willing  to  give  the  proper  officers  of  the  Government  full  and 
prompt  information  of  all  criminal  violations  of  the  banking  laws 
that  came  to  his  knowledge,  and  to  do  everything  in  his  power  to 
further  their  efforts  to  secure  the  punishment  of  offenders  against 
the  laws,  but  that  he  did  not  consider  that  he  was  charged  with 
the  duties  and  responsibilities  of  a  public  prosecutor,  and  that 
this  view  of  the  matter  always  had  been  the  position  of  the 
Bureau. 

After  answering  the  accusations  against  himself  and  the  ad- 
ministration of  his  office,  Mr.  Knox  calls  attention  to  what  he 
termed  some  peculiar  and  noticeable  features  in  the  conduct  of 
the  United  States  Attorney  in  connection  with  the  prosecution 
of  the  officers  of  this  bank,  which,  he  stated,  explains  the  motive 
of  his  bitter  and  malicious  attack  upon  him. 

He  stated  that  within  six  months  after  the  failure  of  the 
bank,  the  receiver  communicated  to  the  United  States  Attorney 
all  the  information  of  which  hi-  had  knowledge,  of  the  causes  which 


102  ROMANCE  AND  TRAGEDY  OF  BANKING 

led  to  the  failure,  but  that  the  latter  took  no  steps  toward  insti- 
tuting official  inquiry  into  the  management  of  the  bank  or  the 
punishment  of  the  delinquent  officers  and  directors.  When  the 
grand  jury,  more  than  a  year  after  the  failure,  took  the  initiative 
and  demanded  that  the  receiver  of  the  bank  should  be  required  to 
appear  before  it,  the  United  States  Attorney  steadily  opposed 
this  demand  on  the  ground  that  the  grand  jury  had  no  right  to 
demand  the  presence  of  any  witnesses  except  upon  the  direction 
of  the  United  States  Attorney,  and  that  he  had  no  knowledge 
of  the  commission  of  any  crime  in  relation  to  the  management  of 
the  bank,  as  the  receiver  had  not  appeared  before  him  and  made 
complaint  under  oath.  It  was  not,  Mr.  Knox  stated,  until  the 
grand  jury  made  complaint  in  open  court  of  their  inability  to 
obtain  the  attendance  of  witnesses  they  wished  to  examine  that 
the  inquest  was  begun. 

Although  the  conduct  of  all  of  the  directors  in  the  manage- 
ment of  the  bank  must  have  become  known  to  the  grand  jury  in 
the  course  of  their  prolonged  investigation,  Mr.  Knox  said,  in- 
dictments were  found  only  against  the  former  president,  vice- 
president  and  cashier  for  declaring  unearned  dividends,  for  pur- 
chasing the  stock  of  the  bank,  and  for  making  false  reports,  but 
no  indictments  were  found  for  wilful  misapplication  of  the  funds 
of  the  bank  in  the  disposition  of  the  immense  sums  of  money  which 
were  lost  by  the  action  of  the  directors.  Nor  were  any  indict- 
ments found  against  any  of  the  other  directors,  although  it  was 
not  reasonable  to  suppose  that  the  three  indicted  officers  were 
alone  responsible  for  the  purchase  of  the  stock  of  the  bank.  Mr. 
Knox,  therefore,  expressed  the  conclusion  that  either  the  grand 
jury  dismissed  the  case  from  consideration  on  their  own  motion, 
or  did  so  on  the  advice  or  influence  of  the  United  States  Attorney. 

Mr.  Knox  concluded  his  report  to  Secretary  Sherman  by  ex- 
pressing the  conviction  that  the  purpose  of  the  United  States 
Attorney  in  making  false  and  groundless  charges  against  him 
was  to  divert  attention  from  his  own  gross  negligence  and  omis- 
sions of  duty,  and  to  conceal  the  partiality  and  inefficiency  of 
official  conduct,  in  order  to  prepare  the  public  mind  in  advance 
for  the  probable  failure  of  the  prosecutions  because  of  some 
weakness  in  the  testimony  or  defect  in  the  indictments. 


103 

But,  be  that  as  it  may,  the  most  remarkable  feature  of  this 
strange  and  eventful  story  is  the  fact  that  a  pool  of  seven  men 
could  borrow  a  million  dollars  from  a  bank  in  the  name  of  another 
bank  with  which  they  had  no  official  connection,  and  through  the 
means  of  a  credit  thus  obtained  secure  a  controlling  interest  in 
the  stock  of  that  bank,  elect  themselves  its  sole  directors,  then 
repay  the  loan  from  the  funds  of  the  institution  and  escape  lia- 
bility for  misapplication  of  such  funds.  It  is  simply  incompre- 
hensible. 

To  what  extent  the  practice  prevailed  in  the  Currency  Bureau, 
if  at  all,  when  Mr.  Knox  was  Comptroller,  in  regard  to  with- 
holding from  the  United  States  Attorney  information  of  crimi- 
nal violations  of  law  on  the  part  of  bank  officers  until  efforts 
were  first  exhausted  to  recover  from  the  accused  any  funds  of 
the  bank  for  which  they  were  liable,  is  not  apparent.  But  such 
was  not  the  practice  in  later  years. 

Bank  examiners  under  their  general  instructions  were  directed 
to  immediately  report  in  writing  to  the  United  States  Attorney 
all  criminal  violations  of  law  on  the  part  of  bank  officers  or  em- 
ployees that  came  to  their  knowledge,  and  to  forward  a  copy  of 
such  report,  in  duplicate,  to  the  Comptroller,  one  copy  for  the 
files  of  the  office  and  the  other  for  the  Department  of  Justice,  so 
that  the  Attorney  General  might  have  knowledge  of  the  complaint 
and  see  that  the  United  States  Attorney,  to  whom  the  complaint 
was  made,  took  prompt  and  proper  action. 

The  Failure  of  the  First  National  Bank  of  Washington,  D,  C. 

The  First  National  Bank  of  Washington,  D.  C.,  was  char- 
tered July  16, 1863,  with  an  authorized  capital  stock  of  $500,000. 
The  principal  stockholders  were  members  of  the  firm  of  Jay  Cooke 
&  Company,  of  Philadelphia,  Pa.,  who  continued  to  control  the 
bank  to  the  date  of  its  failure.  Henry  D.  Cooke,  of  Georgetown, 
D.  C.,  the  first  Governor  of  the  District  of  Columbia  when  the 
district  was  under  territorial  form  of  government,  was  president 
of  the  bank.  At  the  date  of  its  failure,  September  19,  1872,  the 
liabilities,  exclusive  of  capital  stock  and  circulation,  amounted  to 
$1,619,968.  An  assessment  was  levied  upon  the  stockholders  for 


104 

sixty  per  cent.,  or  $3()0,00(),  but  only  $5200  was  collected  from 
this  source.  The  receiver  collected  from  the  assets  $1,447,103. 
This,  together  with  the  amount  realized  from  collateral  in  the 
hands  of  creditors,  and  from  the  assessment  on  the  shareholders, 
enabled  him  to  pay  one  hundred  per  cent,  of  the  claims  proved. 
The  receivership  was  finally  closed  January  24,  1876. 

The  failure  of  this  bank  was  the  subject  of  a  Congressional 
investigation,  under  authority  of  a  resolution  adopted  by  the 
House  of  Representatives  on  February  10,  1874,  a  full  report  of 
which  was  made  by  the  Committee  on  Banking  and  Currency 
during  the  first  session  of  the  Forty-third  Congress. 

From  the  report  of  the  committee  it  appears  that  this  bank 
had  been  a  depositary  of  public  moneys,  and  was  largely  employed 
at  times  as  the  financial  agent  of  the  government,  acting  in  that 
capacity  in  the  conversion  of  the  seven-thirty  bonds  and  in  the 
negotiations  and  funding  of  various  Government  loans  in  connec- 
tion with  the  several  syndicates  formed  for  that  purpose.  The 
bank's  financial  transactions  as  fiscal  agent  for  the  Government 
were  of  great  magnitude,  and  large  profits  were  supposed  to  have 
been  realized  from  its  dealings  in  United  States  securities  of  all 
kinds. 

Another  special  feature  of  this  bank's  business  was  the  con- 
version of  mutilated  currency  for  other  national  banks  and 
bankers  of  the  country,  and  acting  as  agent  for  the  redemption 
of  the  notes  of  such  national  banks  as  kept  a  redemption  account 
with  this  association.  At  the  time  of  the  failure  of  the  bank,  this 
redemption  fund  amounted  to  $750,000. 

The  redemption  feature  of  the  bank's  business  grew  from 
small  beginnings  to  great  proportions,  but  through  lack  of  proper 
system  in  the  management  of  this  branch  of  the  business  the 
greatest  carelessness  and  looseness  in  methods  prevailed.  After 
the  failure  of  the  bank  an  investigation  showed  that  no  adequate 
checks  were  established  to  insure  correctness  and  accuracy.  It 
appeared  that  the  mutilated  currency  did  not  enter  into  the  gen- 
eral cash  account  of  the  bank,  but  was  kept  separate  and  apart 
and  under  the  special  control  of  a  corps  of  clerks.  No  record 
was  found  of  any  cash  settlements  having  been  made  in  this  de- 
partment of  the  bank's  business  to  prove  the  accuracy  of  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  105 

account,  or  to  verify  the  amount  of  currency  on  hand.  The  books 
of  this  department  were  simply  memoranda.  When  mutilated  cur- 
rency was  received,  it  was  entered  on  the  memorandum  books,  and 
from  this  record  remittances  were  made.  When  amounts  were 
remitted  for,  the  drafts  were  credited  in  the  general  books  to  the 
banks  on  which  they  were  drawn  and  a  debit  in  bulk  was  made  to 
an  account  denominated  "Mutilated  Currency."  A  large  amount 
of  currency  received  was  circulation  of  banks  which  kept  no  re- 
demption deposit  with  this  bank,  and  which  it  was  necessary  to 
assort  and  send  in  round  sums  to  the  cities  where  such  notes  were 
redeemable,  for  collection  and  returns.  Such  currency  when  sent 
was  debited  to  the  banks  to  which  it  was  sent  and  credited  in  bulk 
to  "Mutilated  Currency"  account.  The  notes  of  banks  which  kept 
a  redemption  deposit  with  this  bank  were  assorted  and  held  until 
an  accumulation  of  five  hundred  dollars  or  more  was  received, 
when  these  notes  were  sent  to  the  Comptroller  of  the  Currency 
for  cancellation  and  destruction. 

At  that  time  the  notes  were  destroyed  by  burning  instead  of 
by  maceration  as  now.  Large  amounts  of  these  notes  were  sent 
over  to  the  Comptroller's  office  daily.  This  bank  was  located  on 
Fifteenth  Street,  opposite  the  Treasury  Department,  in  the  build- 
ing subsequently  occupied  by  the  Citizens  National  Bank,  which 
bank,  on  November  7,  1904,  was  placed  in  voluntary  liquidation 
and  merged  with  the  National  Metropolitan  Bank  next  door  and 
subsequently  the  building  was  demolished  to  make  room  for  the 
theatre  and  office  building  which  now  occupies  the  site.  These 
notes  were  debited  to  "Burning  Account,"  and  credited  to  "Muti- 
lated Currency  Account"  on  the  books  of  the  bank. 

The  Comptroller  of  the  Currency  issued  to  the  First  National 
Bank  certicates  of  burning  for  such  notes,  which  certificates  were 
sent  by  the  bank  to  the  banks  issuing  the  notes,  with  request  for 
remittance  of  an  equal  amount  of  currency  to  make  good  the 
deficit  in  their  redemption  deposit  fund.  But  instead  of  these 
amounts  being  debited  to  such  fund,  they  were  debited  to  "Burn- 
ing Account,"  thus  leaving  the  balance  to  the  debit  of  that 
account  to  represent  the  amounts  due  from  banks  for  currency 
redeemed  and  destroyed  for  their  account. 


106  ROMANCE  AND  TRAGEDY  OF  BANKING 

It  was  stipulated  on  the  part  of  the  First  National  Bank  that 
returns  for  mutilated  currency  should  be  made  on  the  day  follow- 
ing the  receipt  of  the  currency,  but  the  practice  had  been  to  remit 
in  from  one  to  five  days  after  receipt,  and  for  longer  periods  by 
special  agreement.  In  consequence,  a  large  amount  of  currency 
was  always  on  hand  in  the  First  National  Bank  not  shown  on  its 
general  books,  and  at  the  time  of  the  failure  of  the  bank  the  ac- 
cumulation of  such  currency  amounted  to  $340,000.  At  the  same 
time  $97,000  had  been  sent  to  the  Comptroller  of  the  Currency 
for  burning  without  entry  on  the  books  of  the  bank. 

On  account  of  the  loose  method  of  handling  this  business,  when 
the  accounts  of  the  bank  were  made  up  after  failure,  a  deficit  was 
discovered  of  about  $40,398,  which  never  was  reconciled.  It  was 
afterward  stated  by  some  of  the  employees  of  the  bank,  who  knew 
of  the  criminal  carelessness  in  connection  with  the  conduct  of  this 
branch  of  the  bank's  business,  that  it  was  an  easy  matter  for  any 
employee  to  help  himself  to  some  of  this  money  at  any  time  with- 
out fear  of  discovery. 

The  Treasury  Department  also  seemed  to  be  as  lax  in  its 
methods  of  dealing  with  this  bank  as  the  bank  was  in  handling  its 
redemption  accounts.  At  the  time  of  the  failure,  the  bank  was 
largely  indebted  to  the  Government  over  and  above  the  amount 
of  the  bonds  which  the  Government  held  to  secure  such  indebted- 
ness. 

It  appears  that  as  a  designated  depositary  of  the  Govern- 
ment, the  bank  issued  its  certificates  in  favor  of  the  Treasurer 
of  the  United  States  for  fractional  currency  to  be  forwarded  to 
different  banks  and  bankers  throughout  the  country  which  made 
their  orders  through  this  bank.  In  the  natural  course  of  business, 
such  certificates  would  not  be  very  large  and  the  balance  in  bank 
would  be  kept  down  to  a  proper  amount  by  transfer  orders  made 
as  soon  as  the  weekly  transcripts  or  reports  of  the  bank  received 
at  the  Treasury  Department  could  be  examined. 

At  the  date  of.  failure,  the  bank  was  indebted  to  the  Govern- 
ment to  the  amount  of  $287,782.  Of  this  amount  $125,000  was 
for  certificates  issued  during  the  week  preceding  the  failure,  for 
fractional  currency  shipped  Jay  Cooke  &  Company,  of  Phila- 
delphia, Pa. 


ROMANCE  AND  TRAGEDY  OF  BANKING  107 

At  the  time  these  large  sums  were  forwarded  by  the  Treasury 
Department,  on  the  strength  of  the  certificates  of  this  bank,  the 
bank  was  already  indebted  to  the  Government  for  a  sum  larger 
than  the  amount  of  its  securities  on  deposit  with  the  Treasurer 
of  the  United  States.  The  transaction  with  Jay  Cooke  &  Com- 
pany amounted  simply  to  that  company  obtaining  a  large  loan 
from  the  Government  upon  the  security  of  the  certificates  of  the 
First  National  Bank,  and  the  fact  that  the  company  was  able 
to  do  this  was  due  to  the  laxity  in  methods  on  the  part  of  the 
Treasury  Department,  in  accepting  the  bank's  certificates  instead 
of  money  in  settlement  of  redemptions  of  national  bank  notes. 

Fortunately,  however,  the  Government  was  saved  from  loss  at 
the  time  of  the  failure  of  the  bank  by  the  prompt  action  of  the 
Secretary  of  the  Treasury  in  obtaining  satisfactory  guarantees 
and  securities  for  any  deficiency  that  might  arise  in  the  payment 
of  the  bank's  debts  from  the  assets  of  the  failed  association,  and 
new  regulations  were  put  in  force  in  the  Department  to  guard 
against  any  like  conditions  occurring  in  the  future  by  fully  pro- 
tecting the  interests  of  the  Government  in  its  dealings  with  deposi- 
tary banks. 

The  firm  of  Jay  Cooke  &  Company,  which  failed  at  the  same 
time  that  the  bank  failed,  seemed  to  have  freely  used  the  funds  of 
the  First  National  Bank  to  help  it  in  its  embarrassment,  and  at 
the  date  of  failure  the  firm  owed  the  bank,  directly  and  indirectly, 
nearly  nine  hundred  thousand  dollars. 

Inadequacies  of  the  Law  and  Recommendations  for  Amendments 

As  heretofore  stated,  Comptrollers  in  the  earlier  years  of  the 
Currency  Bureau  were  less  disposed  than  some  of  those  of  later 
years  to  supply  deficiencies  in  the  statutes  by  administrative  reg- 
ulations for  the  correction  of  abuses  and  unsatisfactory  condi- 
tions found  to  exist  in  banks,  but  were  more  inclined  to  recommend 
to  Congress  legislation  which  in  their  judgment  was  deemed  neces- 
sary to  enable  them  to  correct  and  control  such  conditions. 

In  line  with  this  policy,  Mr.  Knox  in  his  several  annual  reports 
called  the  attention  of  Congress  to  a  number  of  objectionable  and 
unsafe  practices  indulged  in  by  banks,  for  which  the  law  provided 


108  ROMANCE  AND  TRAGEDY  OF  BANKING 

no  adequate  remedy,  and  recommended  the  legislation  necessary 
in  his  judgment  to  correct  such  evils. 

The  most  important  amendments  to  the  law  suggested  by  Mr. 
Knox,  and  the  reasons  therefor,  are  the  following: 

Shortly  after  the  Civil  War  some  of  the  Southern  States 
issued  certificates  in  the  form  of  banknotes,  receivable  in  payment 
for  all  debts  due  the  State  issuing  them.  It  was  claimed  that 
under  an  opinion  rendered  by  the  Attorney  General  of  the  United 
States,  such  certificates  were  not  subject  to  the  tax  of  ten  per 
cent,  on  State  bank  circulation  imposed  by  the  Act  of  March  3, 
1865. 

Mr.  Knox  disputed  the  right  of  a  State  to  issue  such  certifi- 
cates, claiming  that  the  Constitution  of  the  United  States  pro- 
hibited any  State  from  emitting  bills  of  credit,  and  that  the  Su- 
preme Court  of  the  United  States  had  held  that  a  note  of  circula- 
tion issued  by  a  State  on  the  credit  of  the  State,  was  a  bill  of 
credit,  and  therefore  was  prohibited  by  the  Constitution. 

It  also  appears  that  savings  banks,  railroad,  municipal  and 
other  corporations  in  some  of  the  Southern  States  issued  a  large 
amount  of  similar  certificates.  To  meet  this  situation,  Mr.  Knox 
recommended  an  amendment  to  the  Act  of  July  17,  1862,  which 
makes  it  a  penal  offense  "to  make,  issue,  circulate,  or  pay  any 
note,  check,  memorandum,  token  or  other  obligation  for  a  less  sum 
than  one  dollar,  intended  to  circulate  as  money,  or  to  be  received 
or  used  in  lieu  of  money,"  so  as  to  prohibit  absolutely  the  issue 
of  such  circulation,  and  thus  prevent  ultimate  loss  to  the  people 
among  whom  such  notes  were  then  obtaining  extensive  credit. 

This  provision  of  law  was  brought  prominently  into  notice  by 
its  re-enactment  in  the  codification  of  the  criminal  statutes  of  the 
United  States,  approved  March  4,  1909,  and  gave  rise  to  the  im- 
pression that  it  was  new  legislation,  and  that  an  ordinary  bank 
check  issued  in  payment  for  a  sum  of  money  less  than  one  dollar 
was  prohibited  by  this  Act.  The  Treasury  Department,  in  reply 
to  numerous  inquiries  on  the  subject,  advised  correspondents  that 
it  had  always  been  held  by  the  department  that  this  law  did  not 
apply  to  bank  checks,  for  the  reason  that  a  bank  check  is  an  order 
on  a  banker  to  pay  a  particular  sum  of  money  and  is  not  designed 
to  circulate  as  a  substitute  for  money,  and  therefore  the  issuing 


ROMANCE.  AND  TRAGEDY  OF  BANKING  109 

of  checks  for  any  amount,  however  small,  was  not  in  conflict  with 
this  statute. 

Mr.  Knox  also  recommended  that  all  officers  of  national  banks 
and  of  Government  depositaries  be  required  to  stamp  the  word 
"Counterfeit"  or  "Illegal"  upon  all  counterfeit  and  unauthorized 
issues  presented  at  their  counters. 

In  connection  with  the  assets  of  insolvent  banks  Mr.  Knox 
recommended  that  the  Comptroller  be  required  to  return  to  an 
agent  of  the  stockholders  of  failed  banks  all  remaining  assets 
after  the  depositors  and  other  creditors  had  been  paid  in  full. 

When  the  declaration  of  a  dividend  to  the  creditors  of  a  failed 
bank  is  delayed  by  protracted  litigation  or  some  other  unavoid- 
able cause,  as  is  frequently  the  case,  he  recommended  that  pro- 
vision be  made  for  the  investment  of  such  funds  of  the  bank  on 
deposit  with  the  Treasurer  of  the  United  States,  in  interest- 
bearing  securities  for  the  time  being. 

As  a  means  of  regulating  and  controlling  the  interest  rates 
paid  by  banks  on  deposits,  he  recommended  the  repeal  of  the  then 
existing  law  imposing  a  tax  of  one-half  of  one  per  cent,  on  all 
deposits  and  the  substitution  of  a  provision  imposing  a  tax  on 
individual  and  bank  deposits  placed  with  banks  or  bankers  under 
an  agreement  or  understanding,  or  with  the  expectation  that 
interest  would  be  paid  thereon.  Such  legislation,  he  claimed,  if 
rigidly  enforced,  would  have  the  effect  of  not  only  reducing  the 
interest  rate  paid  on  deposits  but  would  tend  to  discourage  the 
illegitimate  organization  of  banks.  It  would  also  have  the 
tendency  to  check  competition  for  deposits  through  the  induce- 
ment offered  by  high  interest  rates. 

In  connection  with  the  provision  of  law  authorizing  the  insti- 
tution of  a  suit  to  forfeit  the  charter  of  a  bank  for  violations  of 
law,  he  called  the  attention  of  Congress  to  the  fact  that  there  was 
no  means  provided  for  the  appointment  of  a  receiver  for  such  an 
institution  after  its  charter  had  been  adjudged  forfeited  by  the 
court.  This  deficiency  in  the  statute  continues  to  exist,  and  there 
is  a  possibility  of  a  question  of  jurisdiction  being  raised  sometime 
between  the  court  and  the  Comptroller  as  to  which  has  the  right 
in  such  a  case  to  make  the  appointment.  It  always  has  been  held 
by  the  Comptroller's  office  that  in  such  a  case  the  Comptroller 


110          ROMANCE  AND  TRAGEDY  OF  BANKING 

would  have  authority  to  appoint  the  receiver  under  the  decree  of 
the  court  declaring  the  charter  of  the  bank  forfeited,  but  the 
court  might  dispute  this  right  and  make  the  appointment  himself, 
in  which  case  the  Comptroller  might  decline  to  recognize  the 
receiver  so  appointed,  as  was  done  in  one  case  of  a  receiver  ap- 
pointed by  the  court  on  petition  of  some  of  the  creditors  of  the 
bank,  and  thus  create  a  complication. 

The  Comptroller  recommended  that  deposits  of  one  bank  with 
another  bank  or  banker,  except  national  banks,  be  restricted  to 
the  limit  on  loans.  Subsequent  Comptrollers  held  that  balances 
with  banks  and  bankers  other  than  national  banks  were  loans  sub- 
ject to  the  limit,  but  in  later  years  that  ruling  was  modified,  to 
hold  that  the  limitation  applies  only  to  actual  deposits  with  other 
banking  institutions  and  not  to  balances  subject  to  check,  or  with- 
drawal on  demand.  The  Federal  Reserve  Act,  however,  restricted 
all  balances  with  non-member  banks  to  ten  per  centum  of  the  mem- 
ber bank's  capital  and  surplus. 

The  Act  of  June  30,  1874,  making  appropriations  for  sundry 
civil  expenses  of  the  Government,  contained  a  provision  requiring 
the  banks  to  reimburse  the  Treasury  Department  the  cost  for 
replacing  worn  and  mutilated  circulating  notes.  Mr.  Knox  rec- 
ommended the  repeal  of  this  provision  and  that  such  cost  should 
be  paid  from  the  tax  collected  from  the  banks  on  their  circulation, 
for  the  reason,  he  said,  that  the  Government  receives  the  benefit 
of  all  lost  and  worn-out  circulation  not  finally  returned  for  re- 
demption, and  the  amount  realized  from  this  source  being  far 
greater  than  the  amount  expended  in  the  replacing  of  the  worn- 
out  notes. 

The  corporate  existence  of  the  first  bank  organized  under  the 
national  system  expired  January  1,  1882.  The  expiration  of 
other  associations  followed  in  the  order  of  their  organization. 
To  provide  for  the  continuance  of  such  banks  as  desired  to  remain 
in  the  system,  Mr.  Knox  recommended  an  amendment  to  the  law 
authorizing  such  expiring  banks  to  amend  their  articles  of  asso- 
ciation to  provide  for  an  extension  of  their  corporate  existence 
for  a  further  period  of  twenty  years,  by  the  votes  of  shareholders 
owning  not  less  than  two-thirds  of  the  capital  stock  and  with  the 
approval  of  the  Comptroller  of  the  Currency. 


ROMANCE  AND  TRAGEDY  OF  BANKING  111 

In  the  absence  of  such  an  amendment  to  the  law  it  would  have 
been  necessary  for  every  national  bank  desiring  to  continue  in 
business  to  have  secured  a  special  Act  of  Congress,  or  to  have 
reorganized  as  a  new  association  under  a  new  title.  There  was 
some  question  raised  at  the  time  as  to  the  right  of  shareholders 
of  a  bank  whose  corporate  existence  had  expired  to  organize  a 
new  association  with  the  same  name  as  the  expiring  association, 
and  this  question  was  referred  to  the  Department  of  Justice  for 
determination.  The  Attorney  General,  in  an  opinion  rendered 
February  23,  1882,  held  that  there  was  no  legal  objection  to  the 
stockholders  of  an  expiring  association  organizing  a  new  associa- 
tion, nor  from  assuming  the  name  of  the  old  corporation,  with 
the  approval  of  the  Comptroller  of  the  Currency. 

Mr.  Knox  was  very  insistent  upon  the  enactment  of  a  law 
requiring  the  circulation  of  national  banks  to  bear  the  written 
signatures  of  at  least  one  of  the  officers  of  the  issuing  bank,  and 
he  deemed  this  to  be  a  matter  of  so  much  importance  that  he  pre- 
pared and  had  introduced  in  Congress  a  bill  providing  a  penalty 
upon  any  engraver  or  lithographer  who  should  print  the  signa- 
ture of  a  bank  officer  upon  any  national  bank  note. 

While  the  law  requires  the  circulating  notes  of  a  bank  to  bear 
the  signature  of  the  president,  or  vice-president  and  cashier  of 
the  association  issuing  the  notes,  and  contemplated  that  such  sig- 
natures should  be  written  on  the  notes,  it  also  provides  for  the 
redemption  of  the  notes  by  the  bank,  whether  signed  or  not,  or 
whether  the  signatures  thereon  are  other  than  those  of  the  officers 
indicated,  or  forgeries. 

It  is  immaterial,  therefore,  whether  the  signatures  are  written, 
stamped  or  engraved,  as  far  as  the  redemption  of  the  notes  is  con- 
cerned, and  while  there  was  no  authority  in  law  for  the  engraving 
of  the  signatures  on  the  plates  from  which  the  notes  were  printed 
until  March  3,  1919,  when  the  law  was  amended  to  authorize 
engraved  signatures,  many  banks  sent  their  notes  to  an  engraving 
company  for  completion  in  this  respect,  or  stamped  the  fac-simile 
signatures  of  the  officers  of  the  bank  thereon.  All  the  law  re- 
quires in  this  connection  is  that  the  signatures  appearing  on  the 
notes,  whether  written,  stamped  or  engraved,  shall  be  those  of 
the  president,  or  vice-president  and  cashier. 


112  ROMANCE  AND  TRAGEDY  OF  BANKING 

A  number  of  the  amendments  recommended  by  Mr.  Knox  were 
enacted  into  law  before  he  retired  from  office,  and  others  were 
adopted  later,  with  some  modifications. 

The  National  Bank  Act  was  nearly  ten  years  old  when  Mr. 
Knox  assumed  charge  of  the  Currency  Bureau,  and  between  that 
date  and  the  date  he  retired  from  the  service,  twenty-one  amend- 
ments to  the  law  were  passed,  principally  among  which  were  the 
following : 

Amendments  to  the  Law 

Act  of  June  8,  1872:  Authorizing  the  Secretary  of  the 
Treasury  to  receive  United  States  notes  on  deposit  from  national 
banking  associations  in  sums  of  not  less  than  ten  thousand  dol- 
lars, and  to  issue  certificates  therefor  in  denominations  of  not  less 
than  five  thousand  dollars,  which  certificates  were  authorized  to 
be  counted  as  reserve,  but  drew  no  interest. 

Act  of  February  19,  1873 :  Requiring  the  publication  of  sta- 
tistical information  in  the  Comptroller's  annual  report  in  regard 
to  State  banks. 

Act  of  March  3,  1873 :  Prohibiting  the  use  of  the  word  "Na- 
tional" by  any  banking  institution  other  than  a  national  bank, 
as  part  of  its  title,  and  prescribing  a  penalty  of  fifty  dollars  a 
day  for  violation  of  this  provision. 

Act  of  March  3,  1873 :  Providing  for  an  assessment  of  stock- 
holders to  make  good  an  impairment  of  the  capital  stock  of  a 
bank. 

Act  of  June  20,  1874:  Fixing  the  maximum  amount  of  United 
States  notes  and  providing  for  a  redistribution  of  national  bank 
circulation. 

Act  of  June  23,  1874:  Requiring  the  destruction  of  United 
States  and  national  bank  notes  by  maceration  instead  of  by 
burning. 

Act  of  June  23,  1874 :  Providing  for  a  two-cent  tax  on  bank 
checks. 

Act  of  January  14,  1875 :  Abolishing  the  limit  on  the  aggre- 
gate amount  of  national  bank  circulation.  This  Act  repealed 


ROMANCE  AND  TRAGEDY  OF  BANKING  113 

Section  5177  of  the  Revised  Statutes  of  the  United  States,  and 
authorized  an  increase  of  circulation  by  each  association  without 
regard  to  the  aggregate  amount  outstanding  of  all  the  banks,  and 
removed  the  restriction  as  to  the  apportionment  of  circulation 
among  the  States  and  Territories. 

Act  of  January  19,  1875:  Authorizing  the  formation  of 
national  gold  banks,  to  issue  circulation  redeemable  in  gold  coin 
of  the  United  States. 

Act  of  February  18,  1875:  Correcting  certain  errors  and 
omissions  in  the  Revised  Statutes  of  the  United  States. 

Act  of  February  19,  1875 :  Amending  the  Act  of  June  3, 
1864,  in  regard  to  the  appointment  of  national  bank  examiners 
and  the  method  of  compensation. 

Act  of  March  3,  1875 :  Providing  for  the  printing  of  national 
bank  notes  on  distinctive  paper. 

Act  of  March  3,  1875:  Providing  for  a  clerical  force  for  the 
redemption  of  national  bank  notes,  and  requiring  the  banks  to 
reimburse  the  Treasury  Department  annually  the  amount  ex- 
pended in  the  maintenance  of  such  force. 

Act  of  June  30,  1876 :  Providing  for  the  appointment  of  re- 
ceivers for  national  banks  under  certain  conditions. 

Act  of  February  27,  1877 :  Amending  the  Act  of  March  3, 
1873,  providing  for  an  annual  examination  of  the  plates,  dies, 
bed  pieces,  etc.,  from  which  national  bank  notes  are  printed. 

Act  of  February  27,  1877:  Amending  the  Act  of  June  3, 
1864,  requiring  not  less  than  five  reports  of  condition  to  be  made 
by  the  banks  upon  call  of  the  Comptroller  of  the  Currency. 

Act  of  February  27,  1877:  Amending  the  Act  of  June  3, 
1864,  relative  to  the  manner  in  which  redeemed  notes  shall  be 
destroyed. 

Act  of  March  1,  1879:  Abatement  of  the  semi-annual  duty 
on  circulation  of  insolvent  national  banks. 

Act  of  February  14,  1880:  Authorizing  the  conversion  of 
national  gold  banks  into  currency  associations. 

Act  of  February  26,  1881 :  Authorizing  reports  of  condition 
and  dividend  and  earnings  reports  of  the  bank  to  be  verified  before 


114  ROMANCE  AND  TRAGEDY  OF  BANKING 

a  notary  public,  or  any  other  officer  having  an  official  seal,  auth- 
orized to  administer  oaths. 

Act  of  July  12,  1882:  Authorizing  the  extension  of  the  cor- 
porate existence  of  national  banks. 

Act  of  July  12,  1882:  Authorizing  the  issue  of  gold  certifi- 
cates in  exchange  for  gold  coin. 

Act  of  July  12,  1882 :  Providing  a  penalty  for  falsely  certi- 
fying checks. 

Act  of  March  3,  1883:  Repealing  the  tax  on  capital  and 
deposits. 


HENRY  W.  CANNON 
Comptroller  of  the  Currency,  1884-1886 


CHAPTER  VII 

Henry  W.  Cannon 

HENRY  W.  CANNON,  the  fifth  Comptroller  of  the  Cur- 
rency, was  born  at  Delhi,  N.  Y.,  in  1850.  He  was 
educated  in  the  private  schools  at  Delhi  and  at  the 
Delaware  Literary  Institute.  After  serving  as  a  clerk  in  his 
early  youth,  he  became  teller  of  the  First  National  Bank  of 
Delhi,  and  later  went  to  Minnesota  to  accept  a  position  in  the 
Second  National  Bank  of  St.  Paul.  In  1871,  he  removed  to 
Stillwater,  Minn.,  and  assisted  in  the  organization  of  the 
Lumberman's  National  Bank  of  that  place,  of  which  he  was 
cashier.  He  remained  connected  with  this  institution  for  fifteen 
years.  During  the  same  period  he  was  Secretary  of  the  Chamber 
of  Commerce,  Treasurer  of  the  Water  and  Gas  Companies  of 
Stillwater,  and  was  active  in  the  municipal  affairs  of  Stillwater 
and  other  public  movements.  On  May  12,  1884,  he  was  appointed 
Comptroller  of  the  Currency,  to  succeed  John  Jay  Knox,  and 
served  until  February  2,  1886,  when  he  resigned  to  accept  the 
vice-presidency  of  the  National  Bank  of  the  Republic  of  New 
York  City,  of  which  institution  Mr.  Knox  was  president.  This 
bank  was  organized  in  1850  as  a  State  institution  and  became  a 
national  association  by  conversion  in  1865.  He  remained  with 
this  bank  until  October  30,  1886,  when  he  was  elected  president 
of  the  Chase  National  Bank  of  New  York,  to  succeed  John 
Thompson.  He  continued  as  president  of  this  institution  until 
February,  1904,  when  he  was  succeeded  by  A.  Barton  Hepburn. 

Mr.  Cannon's  term  as  Comptroller  covered  a  period  of  only 
twenty-one  months,  and  while  his  retirement  was  entirely  volun- 
tary, his  administration  was  prematurely  brought  to  a  close  by 
the  election  of  Grover  Cleveland  to  the  Presidency  of  the  United 
States  and  the  party  changes  incident  to  a  new  administration  of 
the  Federal  Government. 


116 


116  ROMANCE  AND  TRAGEDY  OP  BANKING 

Panic  of  1884 

Immediately  following  Mr.  Cannon's  appointment  as  Comp- 
troller he  was  confronted  with  the  financial  panic  of  1884.  This 
disturbance  did  not  really  amount  to  a  panic,  as  it  was  confined 
almost  wholly  to  New  York  City,  and  was  the  result  of  too  close 
an  intimacy  of  some  of  the  New  York  City  banks  with  Stock 
Exchange  transactions. 

During  the  greater  part  of  1883  there  had  been  a  gradual  but 
general  decline  in  values.  Liquidation  had  been  quietly  but  stead- 
ily going  on  for  several  months,  with  a  marked  shrinkage  in  the 
prices  of  commodities  in  general  and  a  curtailment  in  production. 
In  consequence  a  number  of  mercantile  concerns  were  forced  to 
suspend  during  the  latter  part  of  1883,  followed  early  in  1884 
by  the  appointment  of  receivers  for  the  New  York  &  New  Eng- 
land Railroad  Company  and  the  North  River  Construction  Com- 
pany. The  Oregon  and  Trans-Continental  Company,  of  which 
Henry  Villard  was  president,  became  seriously  involved.  This 
company  was  formed  for  the  purpose  of  acquiring  a  controlling 
interest  in  the  stocks  of  the  Northern  Pacific  and  Oregon  Railway 
&  Navigation  Companies. 

During  the  months  of  February,  March  and  April,  1884, 
numerous  commercial  failures  occurred  in  New  York  City,  fol- 
lowed by  a  further  decline  in  stocks  and  bonds  of  all  kinds.  On 
May  6,  1884,  the  Marine  National  Bank  of  New  York  closed  its 
doors,  and  as  a  result  the  brokerage  firm  of  Grant  &  Ward,  with 
which  General  Ulysses  S.  Grant  was  connected,  suspended  on 
May  8.  The  liabilities  of  this  firm  were  over  $16,000,000  and  its 
assets  less  than  $7,000,000.  The  president  of  the  Marine  Na- 
tional Bank  was  also  a  partner  of  Grant  &  Ward.  The  immediate 
cause  of  the  failure  of  the  bank  was  the  over-certification  of  a 
check  of  the  firm  of  Grant  &  Ward  for  the  sum  of  $750,000. 

The  excitement  and  uneasiness  caused  by  these  failures  was 
intensified  by  the  discovery  on  May  13  that  John  C.  Eno,  the 
president  of  the  Second  National  Bank  of  New  York,  was  a  de- 
faulter to  the  extent  of  $3,185,000.  This  disclosure,  coming  at 
the  time  it  did,  when  the  financial  situation  was  under  a  severe 
tension,  had  a  further  depressing  effect  upon  the  stock  market 


ROMANCE  AND  TRAGEDY  OF  BANKING  117 

and  caused  a  still  further  decline  in  stocks.  This  large  shortage, 
however,  was  immediately  made  good,  thereby  averting  the  failure 
of  the  institution. 

Criminal  proceedings  were  instituted  against  Eno  and  immedi- 
ately upon  the  discovery  of  the  defalcation  he  fled  to  Canada, 
where  he  took  refuge  in  Quebec  and  remained  there  until  1903, 
when  he  returned  to  New  York  City  and  surrendered  to  the  Fed- 
eral authorities.  He  was  admitted  to  bail  and  remained  at  liberty 
until  the  indictments  against  him  were  quashed.  In  the  meantime 
his  father,  Amos  R.  Eno,  who  was  known  as  "the  merchant 
prince"  and  reputed  to  be  a  man  of  great  wealth  and  the  owner 
of  the  Fifth  Avenue  Hotel  and  other  valuable  property  in  the 
vicinity  of  Madison  Square,  made  good  the  shortage  of  his  son 
to  the  bank.  In  1903,  nineteen  years  after  the  discovery  of  the 
defalcation,  the  indictments  against  Eno  were  quashed  on  the 
ground  that  it  had  not  been  shown  that  he  had  personally  profited 
by  the  use  of  the  funds  of  the  bank.  At  the  same  time  his  one 
million  interest  in  the  estate  of  his  father,  who  died  in  1908,  was 
assigned  to  W.  N.  Cromwell,  his  lawyer,  in  trust,  to  pay  his  debts. 
Nothing  more  was  heard  of  Eno  in  the  public  prints  until  Decem- 
ber, 1909,  when  he  brought  suit  against  Cromwell  for  an  account- 
ing. By  stipulation  of  counsel  a  referee  was  appointed  to  take 
the  accounting,  who  made  a  report  to  the  court  in  December, 
1911,  showing  that  Cromwell  had  fully  accounted  to  Eno  for  all 
moneys  due  him  and  that  instead  of  Cromwell  owing  him  anything, 
Eno  owed  Cromwell  over  fifty  thousand  dollars.  Eno  died  at  his 
home  in  New  York  City,  February  28,  1914,  of  pneumonia,  after 
a  brief  illness. 

On  May  14,  1884,  the  Metropolitan  National  Bank  of  New 
York  City  suspended  and  the  Northwestern  Car  Company,  con- 
trolled by  United  States  Senator  Sabin  of  Minnesota,  went  into 
the  hands  of  a  receiver.  The  Atlantic  State  Bank  of  Brooklyn, 
of  New  York,  and  the  Newark  Savings  Institution  of  Newark, 
N.  J.,  also  closed  their  doors.  The  failure  of  the  latter  institu- 
tion was  due  to  its  connection  with  the  brokerage  firm  of  Fisk  & 
Hatch,  which  suspended,  together  with  several  other  similar  con- 
cerns. Through  the  assistance  rendered  by  the  Clearing  House 
Association,  under  the  supervision  of  the  National  Bank  Exam- 


118  ROMANCE  AND  TRAGEDY  OF  BANKING 

iner,  the  Metropolitan  National  Bank  was  permitted  to  resume 
business  on  the  day  following  its  suspension.  The  temporary  sus- 
pension of  this  bank  was  the  result  of  a  run  upon  it  by  the  depos- 
itors, who  in  the  panicky  condition  of  the  public  mind  became  dis- 
trustful of  the  management  of  the  bank,  whose  president,  while 
reputed  to  be  a  man  of  considerable  means,  was  known  to  be 
identified  with  numerous  enterprises,  some  of  which  were  more  or 
less  of  a  speculative  nature. 

Public  confidence  was  so  badly  shaken  by  these  successive 
failures  that  a  great  pressure  was  made  to  sell  stocks  and  securi- 
ties of  every  kind,  and  withdrawals  of  bank  deposits  were  quite 
active  and  persistent.  Call  loans  were  difficult  to  collect,  as  bor- 
rowers could  not  obtain  money,  except  by  sacrificing  their  securi- 
ties, and  money  commanded  as  high  as  four  per  cent,  for  a  loan 
for  twenty-four  hours. 

Although  the  situation  was  exceedingly  grave  for  a  time,  the 
prompt  action  of  the  New  York  Clearing  House  Association  in 
issuing  loan  certificates  relieved  the  strain  and  contributed 
greatly  toward  speedily  clarifying  the  financial  atmosphere,  re- 
storing confidence,  and  checking  a  panic,  which,  but  for  such 
action,  would,  no  doubt,  have  spread  to  the  interior  banks  and 
become  general  throughout  the  country,  as  credits  in  St.  Louis 
and  Chicago  were  already  beginning  to  be  affected  by  the  dis- 
turbance. The  panic,  however,  was  confined  almost  wholly  to 
New  York  City  and  vicinity,  and  the  only  failure  of  any  impor- 
tance outside  of  New  York  City,  besides  the  Newark  Savings 
Institution,  during  the  flurry,  was  in  Pittsburgh,  and  this  was  the 
result  of  speculation  in  oil. 

Between  May  15  and  October  3,  1884,  Clearing  House  Loan 
Certificates  to  the  amount  of  $24,915,000  were  issued  by  the  New 
York  Clearing  House  Association,  the  greater  part  of  which  were 
taken  by  banks  having  large  country  bank  balances.  By  July  1 
following  all  of  these  certificates  had  been  redeemed  and  cancelled, 
except  those  that  were  issued  to  the  Metropolitan  National  Bank, 
which  bank  was  unable  to  collect  its  loans  or  to  realize  on  its 
securities  as  promptly  as  the  other  banks,  because  of  the  heavy 
withdrawal  of  deposits,  which  continued  during  this  disturbance 
and  after  it  had  practically  subsided,  necessitating  the  placing 


ROMANCE  AND  TRAGEDY  OF  BANKING  119 

of  this  institution  in  voluntary  liquidation  on  November  18,  1884, 
after  which  date  the  certificates  were  gradually  retired. 

These  certicates  were  issued  to  Clearing  House  banks  upon 
their  bills  receivable  and  securities,  at  the  rate  of  seventy-five 
cents  on  the  dollar,  and  bore  interest  at  the  rate  of  six  per  cent. 

Cause  of  the  Financial  Troubles  of  1884 

In  endeavoring  to  assign  a  cause  for  the  financial  troubles  of 
1884,  Mr.  Cannon,  in  his  annual  report  to  Congress  for  that  year, 
stated  that : 

The  many  profound  students  of  political  economy  have 
for  many  years  endeavored  to  explain  the  causes  which  have 
led  to  financial  troubles  similar  to  those  of  1857,  1873  and 
1884.  *  *  *  It  is  apparent  that  a  repetition  of  the 
same  circumstances  which  brought  about  the  monetary 
crisis  of  1873  was  largely  influential  in  causing  the  crisis 
of  1884.  Property  of  all  kinds  had  been  capital- 
ized, bonds  and  stocks  had  been  issued  for  the  purpose  of 
building  railroads,  carrying  on  manufacturing  and  other 
business,  municipal  and  other  public  improvements,  and 
commercial  credit  was  extended  until  a  point  was  reached 
where  capitalists  of  this  and  other  countries  questioned 
the  intrinsic  value  of  these  securities  and  the  earning 
power  of  the  property  on  which  they  were  based.  A 
decrease  in  the  earnings  of  railroads,  manufacturing  and 
other  enterprises  followed  and  the  entire  business  of  the 
country  was  consequently  restricted  and  deadened. 

The  local  disturbance  among  the  banks,  national,  state 
and  private,  in  New  York  City  was,  as  usual, 
their  intimate  relation  in  many  instances  with  the  New 
York  Stock  Exchange,  and  the  fact  that  a  large  portion 
of  the  loans  made  by  the  banks  and  bankers  of  New  York 
were  based  upon  the  security  of  stocks  and  bonds,  often 
speculative  in  their  character,  which  were  dealt  in  and 
regularly  called  at  the  stock  board. 

Mr.  Cannon  then  proceeded  to  express  some  views  on  the  les- 
sons taught  by  this  panic,  the  relation  between  banking  and  the 


120  ROMANCE  AND  TRAGEDY  OF  BANKING 

legitimate  business  of  the  country,  and  its  influence  upon  healthy 
trade  and  commerce. 

The  principles,  he  said,  which  underlie  judicious  and  sound 
banking  are  the  growth  of  an  experience  of  many  years.  Loans 
should  be  so  made  as  not  to  exceed  a  safe  and  conservative  esti- 
mate of  the  intrinsic  value  of  the  property  represented  by  the 
securities  upon  which  they  are  based,  and  not  upon  a  fictitious 
or  inflated  valuation.  A  distinct  line  should  be  drawn  between 
legitimate  business  and  speculative  undertakings.  Doubtful  en- 
terprises should  be  discouraged  by  refusing  accommodations  to 
those  known  to  be  engaged  in  their  promotion,  even  though  the 
possibilities  of  large  profits  may  be  assured. 

The  value  of  an  exchange  for  the  convenient  handling  of 
stocks  and  securities,  he  said,  is  unquestioned,  but  when  the  mem- 
bers of  such  exchange  who  have  associated  themselves  together 
for  the  purpose  of  furthering  the  commercial  business  of  the 
country,  use  the  machinery  of  this  exchange  to  create  speculative 
values  and  to  increase  or  decrease  prices  of  stocks  and  bonds  for 
speculative  purposes,  they  engage  in  and  encourage  a  form  of 
gambling  to  the  great  detriment  of  the  legitimate  business  inter- 
ests of  the  country,  and  such  operations  should  be  prohibited  by 
either  State  or  national  legislation,  or  by  both. 

The  views  expressed  by  Mr.  Cannon  in  1884  on  this  subject 
are  unquestionably  as  wholesome  and  sound  at  the  present  time 
as  they  were  then,  and  it  would  be  well  for  the  banking  and  busi- 
ness interests  of  the  country  if  they  were  heeded.  But  the  banker 
who  heeds  such  advice  usually  does  not  need  it,  and,  unfortu- 
nately, the  one  who  needs  it  does  not  heed  it.  Too  frequently  the 
latter  is  found  to  be  himself  engaged  in  the  promotion  of  specu- 
lative undertakings  or  identified  with  doubtful  enterprises  such 
as  Mr.  Cannon  so  properly  condemned,  and  through  him  the  bank 
with  which  he  is  connected. 

As  a  rule,  bankers  are  not  inclined  to  assume  unusual  risks 
in  the  investment  of  the  funds  of  their  institution  in  speculative 
loans  for  the  sole  purpose  of  the  large  profit  that  may  inure  to 
the  bank  from  such  investments.  It  will  usually  be  found  that 
where  such  loans  or  investments  have  been  made  some  of  the 
officers  or  directors  of  the  bank  are  individually  interested  in  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  121 

enterprise  in  which  the  funds  are  risked,  and  if  the  venture  proves 
to  be  successful,  personally  reap  the  benefit  of  the  larger  part  of 
the  profits,  but,  if  unsuccessful,  throw  the  burden  of  the  loss  upon 
the  bank. 

If  all  bankers  were  to  adopt  and  strictly  adhere  to  the  golden 
rules  laid  down  by  Mr.  Cannon  for  the  guidance  of  their  official 
conduct,  there  would  be  no  longer  any  necessity  for  "Be  it  en- 
acteds"  to  regulate  or  control  bank  management,  and  financial 
panics,  such  as  that  of  1884?,  would  cease  to  occur.  But  as  long 
as  human  impulse  is  influenced  by  avarice  and  greed,  just  so  long 
will  financial  disturbances,  such  as  have  been  produced  in  the  past 
from  the  causes  stated,  be  repeated  in  the  future,  unless  prevented 
by  the  remedial  legislation  suggested  by  Mr.  Cannon,  or  by  the 
enactments  of  Congress  in  later  years. 

Aside  from  the  panic  of  1884,  very  little  of  any  particular 
moment  occurred  during  the  remainder  of  Mr.  Cannon's  brief 
term  as  Comptroller. 

During  the  less  than  twenty-two  months  that  Mr.  Cannon 
held  the  office  he  made  two  reports  to  Congress.  The  first 
report  was  devoted  largely  to  a  discussion  of  the  panic  of 
1884  and  its  causes,  and  the  necessity  for  some  legislation  which 
would  make  the  issuing  of  circulation  more  profitable  to  the 
banks.  He  expressed  the  view  that  while  public  confidence  in 
national  banks  would  enable  associations  organized  under  the  Act 
to  do  a  much  larger  and  more  profitable  business  than  if  organized 
under  State  laws,  it  was  possible  that  they  would  be  unwilling  to 
submit  to  the  restrictions  of  the  national  banking  laws  but  for  the 
privilege  of  issuing  circulation  under  conditions  that  would  make 
it  profitable.  Mr.  Cannon,  therefore,  seemed  to  entertain  the 
opinion  that  the  circulation  issuing  privilege  was  the  principal 
advantage  of  national  banks  over  State  institutions,  and  should 
the  profit  on  circulation  at  any  time  be  reduced  to  a  point  where 
its  issue  would  not  compensate  the  banks  for  the  inconvenience 
of  submitting  to  the  restrictions  imposed  by  the  national  banking 
laws,  many  banks  would  leave  the  system  and  reorganize  under 
State  laws,  which  were  more  liberal  in  the  powers  extended. 

While  the  original  purpose  of  the  National  Bank  Act  was  to 
create  a  market  for  United  States  bonds  by  providing  a  uniform 


122 

circulation  for  the  whole  country,  based  upon  the  security  of 
such  bonds,  the  issuing  of  such  circulation  was  not  compulsory, 
and  the  privilege  long  ago  ceased  to  be  considered  the  principal 
function  of  the  banks.  In  later  years  of  so  little  importance  was 
this  privilege  considered  that  for  a  long  time  several  of  the  larger 
banks  issued  no  circulation  at  all,  and  a  number  of  them  the 
amount  only  of  the  minimum  bond  deposit  required  by  law. 

Mr.  Cannon  seems  to  have  modified  his  views  in  regard  to  the 
importance  of  this  privilege  before  he  retired  from  office.  In  his 
second  annual  report  he  expressed  the  opinion  that  it  was  believed 
that  the  national  banking  system  would  be  continued,  even  if  the 
associations  organized  under  it  could  not  issue  circulation  at  a 
profit,  because  of  the  greater  prestige  of  national  banks  operat- 
ing harmoniously  under  one  general  law,  uniform  throughout  the 
whole  country,  over  institutions  organized  under  State  laws 
widely  varying  in  character,  and,  in  some  instances,  incomplete 
or  defective. 

No  feature  of  the  national  banking  system  received  greater 
attention,  or  was  more  thoroughly  studied  and  discussed  by 
writers  of  all  shades  of  opinion,  than  the  currency-issuing  func- 
tion of  the  banks,  and  upon  no  question  was  there  a  greater  diver- 
gence of  views.  On  one  phase  of  the  subject  only  did  all  agree, 
and  that  was  the  need  for  a  currency  as  safe  as  our  bond-secured 
circulation  but  more  elastic  and  responsive  to  the  varying  de- 
mands of  trade  and  commerce. 

Mr.  Cannon,  like  nearly  all  of  his  predecessors  and  successors, 
thoroughly  discussed  this  question.  In  anticipation  of  the  time 
when  the  reduction  of  the  public  debt  would  make  it  imperative 
to  provide  some  other  security  for  banknote  circulation  than  Gov- 
ernment bonds,  in  his  second  annual  report  he  reviewed  the 
methods  of  issuing  and  securing  banknote  circulation  by  the  prin- 
cipal commercial  nations  of  the  world,  and  while  admitting  that 
such  systems  successfully  operated  under  other  forms  of  govern- 
ment than  ours  might  not  be  wholly  adapted  to  our  needs,  he  was 
of  the  opinion  that  from  the  experience  of  all  some  valuable  deduc- 
tions could  and  should  be  drawn,  which  would  enable  us  to  pro- 
vide a  currency  that  would  adequately  and  satisfactorily  meet 
our  business  and  political  necessities. 


123 

But  years  elapsed  after  Mr.  Cannon  expressed  his  views  on 
this  subject  before  anything  was  done.  The  banking  and  cur- 
rency systems  of  the  older  nations  of  the  world  were  thoroughly 
studied  and  analyzed  by  recognized  authorities.  Volumes  were 
written  upon  the  subject.  Students  of  finance  and  authorized 
monetary  commissions  viewed  their  oprations  at  close  range  and 
at  public  expense,  but  no  accepted  solution  of  the  problem  was 
reached  until  the  enactment  of  the  Federal  Reserve  Act  "To  pro- 
vide for  the  establishment  of  Federal  Reserve  banks,  to  furnish 
an  elastic  currency,  to  afford  means  of  rediscounting  commercial 
paper,  to  establish  a  more  effective  supervision  of  banking  in  the 
United  States  and  for  other  purposes,"  approved  December  23, 
1913. 


Failure  of  the  Marine  National  Bank  of  New  York 

There  were  thirteen  failures  of  national  banks  during  Mr. 
Cannon's  administration,  not  including  the  Metropolitan  Na- 
tional Bank  of  New  York,  which  suspended  during  the  panic  of 
1884,  but  resumed  business  the  following  day. 

The  largest  and  most  important  of  these  failures  was  that  of 
the  Marine  National  Bank  of  New  York,  referred  to  in  the  pre- 
ceding pages.  This  bank  had  been  a  source  of  suspicion  for  some 
time  previous  to  its  suspension,  because  of  the  extensive  opera- 
tions of  its  president,  James  D.  Fish,  in  real  estate,  and  his  con- 
nection with  the  brokerage  firm  of  Grant  &  Ward,  of  which  he 
was  a  member.  This  firm  was  indebted  to  the  national  associa- 
tion, directly  and  indirectly,  to  the  amount  of  over  two  and  a 
half  millions  of  dollars.  This  indebtedness  was  almost  wholly  un- 
secured, and  the  firm  had  overdrawn  its  account  with  the  bank  to 
the  extent  of  over  $750,000.  The  firm  carried  three  accounts 
with  the  bank,  a  private  account  of  one  member  of  the  firm,  a 
general  account,  and  a  special  account.  Many  of  the  notes  for 
which  the  firm  was  liable  were  in  the  names  of  clerks  employed  by 
the  firm,  of  no  financial  standing,  and  relatives  of  one  of  its  mem- 
bers. The  record  shows  that  within  less  than  a  month  before  tht- 
failure  of  the  bank  a  committee  appointed  by  the  directors  made 
an  examination  of  its  affairs  and  reported  everything  in  a  satis- 


124  ROMANCE  AND  TRAGEDY  OF  BANKING 

factory  condition,  and  within  an  hour  before  the  bank  closed  its 
doors  the  directors  were  in  session  and  were  apparently  wholly 
ignorant  of  its  true  condition. 

The  disclosures  following  the  failure  showed  the  institution  to 
be  hopelessly  insolvent  and  that  for  some  time  previous  thereto  it 
had  been  in  the  grip  of  the  firm  of  Grant  &  Ward,  which  had  been 
extended  credit  beyond  all  prudence  and  reason,  amounting  in  the 
aggregate  to  six  times  the  capital  of  the  association.  The  failure 
of  this  firm  necessitated  the  immediate  closing  of  the  bank. 

The  capital  of  this  bank  was  $400,000  and  the  book  value 
of  its  assets  and  liabilities  was  over  $6,700,000.  A  receiver 
was  appointed  May  13,  1884,  and  an  assessment  was  levied 
by  the  Comptroller  upon  its  stockholders  for  $400,000,  or  one 
hundred  per  cent.,  to  pay  the  debts  of  the  association.  Of  this 
amount  $272,896  was  collected.  The  creditors  were  paid 
$3,774,704,  or  83.465  per  cent,  of  their  claims.  The  receivership 
was  finally  closed  September  30,  1899,  fifteen  years  after  the  date 
of  failure  of  the  bank. 

The  prolongation  of  this  receivership  so  far  beyond  the  aver- 
age time  required  to  liquidate  an  insolvent  national  bank  was  due 
to  the  unusual  difficulties  encountered  by  the  receiver  in  liquidat- 
ing the  bank's  own  assets  and  the  enormous  litigation  in  connec- 
tion with  the  closing  of  the  estates  of  the  firm  of  Grant  &  Ward 
and  James  D.  Fish,  the  president  of  the  Marine  National  Bank, 
with  which  the  affairs  of  the  bank  were  inextricably  involved.  In 
consequence  of  this  litigation  the  bank  was  not  cleared  of  its  en- 
tanglements with  these  estates  until  1891,  when,  under  a  decree  of 
the  court,  the  Marine  National  Bank  received  every  dollar  of  all 
the  assets  of  Grant  &  Ward,  amounting  to  about  $500,000,  and 
$100,000  from  the  estate  of  James  D.  Fish. 

Further  delay  was  occasioned  by  the  litigation  over  the  ques- 
tion of  the  right  of  savings  banks  in  New  York  to  preference  over 
all  other  creditors.  A  suit  involving  this  question  was  then  pend- 
ing in  the  State  courts  of  New  York,  in  the  case  of  Davis  v.  The 
Elmira  Savings  Bank.  The  Metropolitan  Savings  Bank  of  New 
York  City  was  a  creditor  of  the  Marine  National  Bank  for 
$120,000,  and  served  notice  on  the  receiver  that  under  the  bank- 
ing laws  of  the  State  of  New  York  preference  was  claimed  over 


ROMANCE  AND  TRAGEDY  OF  BANKING  125 

all  other  creditors  for  the  payment  of  this  claim  in  full.  This 
notice  had  the  effect  of  tieing  up  the  remaining  assets  of  the 
Marine  National  Bank  in  the  hands  of  the  receiver  until  this  ques- 
tion could  be  judicially  determined.  The  State  courts  rendered  a 
decision  in  favor  of  the  Elmira  Savings  Bank,  and  the  receiver  of 
the  Elmira  National  Bank  appealed  from  that  decision  to  the 
Supreme  Court  of  the  United  States,  where  the  matter  rested  until 
March,  1896,  when  the  latter  court  overruled  the  decision  of  the 
State  court  and  held  that  the  provision  of  the  New  York  State 
banking  law,  making  debts  due  a  savings  bank  by  an  insolvent 
bank  a  preferred  lien,  was  repugnant  to  the  Revised  Statutes  of 
the  United  States,  requiring  the  assets  of  an  insolvent  national 
bank  to  be  distributed  ratably  among  the  creditors  of  such  bank, 
and  was  therefore  inapplicable  in  the  case  of  a  national  bank. 

Failure  of  the  Brokerage  Firm  of  Grant  <§•  Ward 

The  firm  of  Grant  &  Ward  was  organized  in  1880  and  origi- 
nally consisted  of  Ferdinand  Ward,  Ulysses  S.  Grant,  Jr.,  and 
James  D.  Fish.  General  U.  S.  Grant  did  not  become  connected 
with  the  firm  until  subsequent  to  his  return  from  his  memorable 
tour  of  Europe,  after  the  close  of  his  second  term  as  President 
of  the  United  States.  At  first  the  General  was  a  limited  partner 
only,  with  a  one-seventh  interest  in  the  business,  but  later  he 
became  an  equal  partner. 

In  some  reminiscences  of  General  Grant,  written  by  Ferdinand 
Ward  and  published  in  December,  1909,  Ward  claimed  that  in- 
stead of  the  firm  of  Grant  &  Ward  being  responsible  for  the  fail- 
ure of  the  Marine  National  Bank,  as  was  the  general  belief,  the 
reverse  was  the  case,  and  that  the  failure  of  the  firm  was  the  result 
of  its  efforts  to  bolster  up  the  bank  when  it  was  in  a  desperate 
condition,  owing  to  large  and  continued  withdrawals  of  deposits 
during  the  financial  stress  of  1884.  The  record,  however,  does 
not  support  this  contention,  but  shows  that  the  failure  of  the 
bank  was  directly  due  to  its  loose  methods  of  dealing  with  the 
brokerage  firm  of  Grant  £  Ward  and  the  large  unsecured  and 
uncollectable  indebtedness  of  this  firm  to  the  bank. 


126  ROMANCE  AND  TRAGEDY  OF  BANKING 

While  General  Grant's  individual  resources  suffered  seriously 
through  his  unfortunate  connection  with  the  firm  of  Grant  & 
Ward  and  he  may  have  temporarily  lost  something  in  prestige, 
whatever  part  he  played  in  the  financial  tragedy  which  brought 
loss  and  ruin  to  so  many  and  saddened  the  closing  months  of  his 
honorable  and  eventful  career,  no  stigma  of  dishonor  or  imputa- 
tion of  wilful  wrong-doing  ever  attached  to  his  name  in  connection 
with  the  transactions  of  this  firm  or  in  any  of  his  public  acts  or 
personal  business  dealings  with  his  fellow-man. 

James  D.  Fish  was  indicted  in  June  following  the  failure  of 
the  bank,  for  embezzling  and  misapplying  the  funds  of  the  asso- 
ciation, and  Ferdinand  Ward  was  indicted  at  the  same  time  for 
aiding  and  abetting  him.  In  December,  1884,  upon  closer  exam- 
ination of  the  law  and  a  fuller  knowledge  of  the  facts,  both  Fish 
and  Ward  were  reindicted  to  more  fully  cover  all  their  transac- 
tions, including  false  entries  in  the  books  of  the  bank  made  for  the 
purpose  of  deception. 

The  trial  of  Fish  was  held  during  March  and  April,  1885, 
occupying  a  month,  and  resulted  in  his  conviction.  Exceptions 
were  taken  by  his  counsel  to  some  of  the  points  of  law  involved 
and  arguments  were  heard  before  the  full  bench  on  these  excep- 
tions in  June,  1885,  with  the  result  that  the  Government  was  sus- 
tained and  Fish  was  sentenced  for  a  term  of  ten  years  in  the  peni- 
tentiary. 

Ferdinand  Ward,  in  the  meantime,  was  confined  in  the  Ludlow 
Street  jail,  under  arrest  by  the  State  authorities,  which  prevented 
his  trial  under  the  Federal  indictment  as  an  aider  and  abettor  of 
Fish.  He  was,  however,  indicted  by  the  State  Grand  Jury,  for 
larceny  in  obtaining  money  under  false  pretenses  by  the  use  of 
checks  on  a  bank  in  which  he  had  no  funds,  with  the  intent  to  de- 
ceive and  defraud.  His  trial  commenced  on  October  28,  1885, 
lasted  one  week,  and  resulted  in  his  conviction  and  sentence  to  the 
penitentiary  for  a  term  of  ten  years. 

Fish,  after  serving  the  greater  part  of  his  sentence  in  the 
Auburn  State  Prison,  was  pardoned  by  President  Cleveland. 
After  his  release  from  the  penitentiary,  he  lived  in  strict  retire- 
ment and  spent  much  of  his  time  in  his  library  among  his  books 
and  papers,  of  which  he  had  a  rare  collection.  He  died  at  his 


127 

residence  in  Brooklyn,  N.  Y.,  in  March,  1912,  at  the  advanced 
age  of  ninety-three  years. 

Legislation  Recommended 

No  amendments  to  the  national  banking  or  currency  laws  were 
enacted  during  Mr.  Cannon's  administration,  and  the  only  ma- 
terial amendment  recommended  by  him  was  in  connection  with 
cotton  loans  by  the  banks  in  the  South.  Loans  of  this  character 
during  Mr.  Cannon's  time  and  for  many  years  thereafter  were  a 
source  of  perplexity  to  the  Comptroller's  office  and  to  the  banks 
in  the  cotton  sections  as  far  as  the  handling  of  cotton  transac- 
tions within  the  limitations  of  law  were  concerned  as  then  defined 
by  Section  5200,  Revised  Statutes  of  the  United  States.  Cotton 
loans  were  represented  largely  by  overdrafts,  the  very  worst  form 
in  which  credit  can  be  extended,  and  were  subject  to  the  statutory 
limit.  It  seemed  impossible,  or  impracticable  at  least,  for  cotton 
buyers  to  handle  their  purchases  in  a  way  that  would  bring  their 
transactions  with  the  banks  within  the  exceptions  to  the  limit  of 
loans.  A  great  deal  of  cotton  is  bought  in  small  quantities  from 
different  planters  and  must  be  paid  for  in  cash.  The  banks  are 
called  upon  to  supply  the  funds  for  this  purpose  while  the  cotton 
is  being  assembled  and  held  for  shipment.  Notes  or  drafts  cannot 
always  be  used  in  making  such  purchases,  and  therefore  it  is  im- 
possible for  the  cotton  buyers  to  obtain  accommodations  from 
the  banks  in  the  form  of  discounts  of  commercial  or  business 
paper  or  bills  of  exchange,  which  are  excepted  from  the  limit  of 
loans.  Cotton  stored  in  warehouses  is  an  excellent  and  perfectly 
safe  security  for  loans,  but  as  the  law  made  no  distinction  between 
a  secured  and  unsecured  loan  in  fixing  the  limit,  advances  made 
upon  the  security  of  warehouse  receipts  were  subject  to  the  stat- 
utory restriction  the  same  as  other  loans. 

Various  forms  of  evasion  or  circumvention  of  the  law  were 
resorted  to  by  the  banks  in  making  cotton  loans,  and  the  Comp- 
troller was  frequently  appealed  to  for  a  more  liberal  interpreta- 
tion of  its  provisions.  The  language  of  the  statute,  however,  was 
explicit  and  would  admit  of  no  equivocation.  Only  two  exceptions 
were  made,  namely,  the  discount  of  commercial  or  business  paper 


UN          ROMANCE  AND  TRAGEDY  OF  BANKING 

and  bills  of  exchange,  drawn  in  good  faith  against  actually  exist- 
ing values. 

It  was  contended  by  some  bankers  that  a  draft  drawn  by  an 
agent  upon  the  corporation  or  firm  which  he  represented,  and 
accepted  by  the  corporation  or  firm,  was  a  bill  of  exchange  within 
the  meaning  of  the  law  and  as  such  was  excepted  from  the  limit 
of  loans.  Such  paper,  however,  has  none  of  the  characteristics 
of  a  bill  of  exchange,  which  must  be  drawn  by  one  person  upon  a 
second,  payable  to  a  third  person.  Where  a  bill  of  exchange  is 
drawn  by  an  agent  upon  his  principal  there  is  only  one  party 
liable  for  the  funds  represented.  When  drawn  by  a  corporation 
or  firm  upon  itself  it  was  held  to  be  nothing  more  than  a  promise 
to  pay  money  in  accordance  with  the  terms  of  the  draft.  There 
is  only  one  party  to  the  paper.  It  is,  in  substance,  a  promissory 
note.  The  law  does  not  require  it  to  be  presented  to  the  drawee 
for  acceptance,  as  he  had  already  accepted  the  draft  by  drawing 
it.  Such  an  instrument,  therefore,  is  not  a  bill  of  exchange,  as  it 
does  not  bind  for  payment,  after  acceptance,  a  drawer  and  a 
drawee  as  distinct  persons,  companies,  corporations  or  firms. 

It  was  impossible,  therefore,  for  the  Comptroller  to  so  inter- 
pret the  law  as  to  afford  the  banks  of  the  South  the  relief  they 
desired  to  enable  them  to  extend  to  their  customers  the  accommo- 
dations necessary  to  handle  their  cotton  purchases.  Mr.  Cannon, 
therefore,  recommended  that  the  law  be  amended  so  as  to  permit 
loans  in  excess  of  the  ten  per  cent,  limit  to  be  made  upon  the 
security  of  warehouse  receipts  or  some  other  form  of  collateral. 
This  could  safely  have  been  done  within  proper  limitations. 

The  Federal  Reserve  Act,  enacted  in  December,  1913,  auth- 
orized the  banks  to  extend  credit  by  accepting  drafts  or  bills  of 
exchange  which  grow  out  of  transactions  involving  the  importa- 
tion or  exportation  of  goods  or  which  grow  out  of  transactions 
involving  the  domestic  shipment  of  goods,  provided  shipping  doc- 
uments conveying  or  securing  title  are  attached  at  the  time  of 
acceptance;  or  which  are  secured  at  the  time  of  acceptance  by  a 
warehouse  receipt  or  other  such  document  conveying  or  securing 
title  covering  readily  marketable  staples.  This  provision  of  law, 
however,  did  not  relieve  the  situation  materially  in  the  cotton 
states,  as  the  volume  of  business  of  this  kind  which  the  banks 


ROMANCE  AND  TRAGEDY  OF  BANKING  129 

could  handle  was  very  restricted.  Furthermore,  the  acceptance 
business  was  a  new  feature  in  banking  which  was  not  readily  or 
clearly  understood  by  the  average  country  banker. 

It  was  not  until  the  amendment  of  October  22,  1919,  to  Sec- 
tion 5200  that  material  relief  was  afforded  the  banks  in  the  way 
of  extending  larger  accommodations  to  dealers  in  cotton  and 
other  commodities. 

This  amendment  to  the  law  authorized — 

1.  The  discount,  without  limit,  of  drafts  and  bills  of 

exchange  secured  by  shipping  documents  con- 
veying title  to  goods  shipped. 

2.  Demand  obligations  when  secured  by  documents  cov- 

ering commodities  in  actual  process  of  shipment. 

3.  Bankers'  acceptances  of  the  kinds  described  in  the 

Federal  Reserve  Act. 

4.  Discount  of  notes  up  to  twenty-five  per  centum  of 

the  capital  and  surplus  if  secured  by  shipping 
documents,  warehouse  receipts,  or  other  such 
documents  conveying  or  securing  title  covering 
readily  marketable  non-perishable  staples,  in- 
cluding livestock,  when  the  actual  market  value 
of  the  property  securing  the  obligation  is  not  at 
any  time  less  than  one  hundred  and  fifteen  per 
centum  of  the  face  amount  of  the  notes  secured 
by  such  documents  and  when  such  property  is 
fully  covered  by  insurance. 

This  latter  provision  extending  the  limitation  on  direct  loans 
had  been  in  force  only  a  short  time  at  the  date  of  this  writing, 
but  it  is  believed  that  it  will  enable  the  banks  of  the  South  and 
elsewhere  to  satisfactorily  and  adequately  finance  transactions  in 
cotton  and  in  other  staple  products  within  prudent  and  legal 
limitations. 


WILLIAM  L.  TRENHOLM 
Comptroller  of  the  Currency,  i886-ii 


CHAPTER  VIII 

Administration  of  Comptroller  Trenholm 

WILLIAM  L.  TRENHOLM,  the  sixth  Comptroller  of  the 
Currency,  was  born  at  Charleston,  S.  C.,  February  3, 
1836.  After  graduation  from  the  South  Carolina  Col- 
lege he  became  a  partner  in  the  commercial  houses  of  John  Fraser 
&  Company,  of  Charleston;  Trenholm  &  Company,  of  New  York, 
and  Fraser,  Trenholm  &  Company,  of  Liverpool,  England.  He 
lived  in  England  for  two  years.  He  volunteered  for  service  with 
the  South  Carolina  troops  in  December,  1861,  and  served  in  the 
Confederate  Army  throughout  the  Civil  War. 

After  the  close  of  the  war,  he  resumed  business  in  Charleston. 
In  November,  1885,  he  was  appointed  one  of  the  Board  of  United 
States  Civil  Service  Commissioners,  and  retained  this  position 
until  he  was  appointed  Comptroller  of  the  Currency  by  President 
Cleveland,  April  20,  1886.  He  was  the  first  Democrat  who  ever 
held  the  office  of  Comptroller.  With  the  exception  of  these  two 
positions,  he  never  before  had  held  public  office,  except  that  of 
Alderman  in  the  Common  Council  of  his  native  city. 

His  administration  of  the  Currency  Bureau  extended  to  April 
30,  1889,  although  he  practically  relinquished  the  office  on  Janu- 
ary 1,  1889,  to  accept  the  presidency  of  the  American  Surety 
Company  of  New  York  City,  which  he  assisted  in  organizing.  He 
was  president  of  this  company  until  January  18,  1898,  when  he 
voluntarily  resigned,  to  accept  the  presidency  of  the  North  Amer- 
ican Trust  Company  of  New  York,  which  position  he  assumed  on 
the  following  day.  He  resigned  from  this  company  in  May,  1899, 
after  which  time  he  devoted  his  attention  to  his  private  business 
affairs.  He  died  in  New  York  City,  of  pneumonia,  January  11, 
1901,  at  the  age  of  sixty-five. 

Mr.  Trenholm  was  a  scholarly  and  most  genial  gentleman, 
affable,  and  considerate  of  everybody  with  whom  he  came  in  busi- 
ness or  social  contact.  He  was  a  man  of  strict  integrity,  firm  in 


131 


132  ROMANCE  AND  TRAGEDY  OF  BANKING 

his  convictions  and  tenacious  in  his  views.  Although  of  limited 
financial  means,  he  was  generous  to  a  fault.  He  was  esteemed 
very  highly  by  the  officers  and  employees  of  the  Currency  Bureau 
and  by  the  officials  of  the  Treasury  Department  in  general. 

Unprecedented  Reduction  in  Circulation 

The  first  year  of  Mr.  Trenholm's  administration  of  the  Cur- 
rency Bureau  was  marked  by  an  unprecedented  reduction  in  na- 
tional bank  circulation.  During  that  year  the  circulation  was 
reduced  $56,593,533,  the  largest  reduction  during  one  year  in  the 
history  of  the  Bureau. 

This  large  retirement  of  circulation  was  due  to  the  high 
premium  which  prevailed  on  the  four  and  four  and  one-half  per 
cent.  Government  bonds,  and  the  rapid  retirement  of  the  three 
per  cent,  bonds,  redeemable  at  the  option  of  the  Government.  Of 
the  $224,612,150  of  these  bonds  outstanding  June  30,  1884,  the 
banks  held  $172,412,550,  and  by  June  30,  1886,  the  total  of  these 
bonds  had  been  reduced  to  $144,046,600,  of  which  amount  the 
banks  held  $107,782,100.  The  high  premium  on  the  four  and 
four  and  one-half  per  cent,  bonds  induced  many  banks  to  reduce 
their  bond  deposits  to  the  minimum  required  by  law,  in  order  to 
dispose  of  the  excess  and  take  advantage  of  the  prevailing  high 
premium.  One  hundred  and  seventy-two  new  banks  were  organ- 
ized during  that  year,  and  as  the  three  per  cent,  bonds  were  sub- 
ject to  call  at  any  time,  there  was  no  disposition  to  invest  in  these 
securities.  This  had  the  effect  of  increasing  the  demand  for  the 
four  and  four  and  one-half  per  cent,  bonds  and  stimulated  their 
market  value. 

The  Act  of  July  12,  1882,  authorized  an  issue  of  three  per 
cent,  bonds  for  the  purpose  of  taking  up  the  three  and  one-half 
per  cents.,  and  during  the  years  1886  and  1887  the  three  per  cent, 
bonds  were  called  by  the  Treasury  Department  for  redemption, 
which  resulted  in  a  further  reduction  of  circulation.  From  1882 
to  1887,  there  were  991  new  banks  organized,  with  an  authorized 
capital  stock  of  one  hundred  and  eleven  millions  of  dollars.  While 
these  banks  were  entitled  to  receive  $99,999,000  in  circulation, 


ROMANCE  AND  TRAGEDY  OF  BANKING  133 

they  deposited  only  $23,892,100  in  bonds,    and    received    only 
$21,495,100  in  circulation. 

The  interest  on  the  three  and  one-half  per  cents,  ceased  when 
they  were  called  for  redemption.  Consequently,  they  were  no 
longer  available  as  security  for  circulation,  as  the  law  required  a 
deposit  of  interest-bearing  bonds.  It  was  claimed  by  some  of  the 
banks  that  when  a  deposit  of  interest-bearing  bonds  had  once  been 
made  the  banks  could  not  be  compelled  to  replace  them  with  other 
bonds,  or  to  retire  the  circulation  issued  upon  them.  This  ques- 
tion was  finally  settled,  however,  by  an  opinion  of  the  Attorney 
General  of  the  United  States,  to  whom  the  matter  was  referred, 
who  held  that  bonds  on  which  interest  had  ceased  could  not  law- 
fully be  received  or  held  as  security  for  circulation. 

Comptroller  Trenholm' s  Circular  Letter  to  the  Banks 

In  1887  Comptroller  Trenholm  sent  a  circular  letter  to  all 
the  national  banks  inviting  them  to  submit  such  suggestions  for 
amendments  to  the  national  banking  laws  as,  in  their  judgment, 
would  tend  toward  the  improvement  and  perpetuation  of  the  sys- 
tem. More  than  forty  plans  were  involved  in  the  replies  received, 
all  bearing  upon  the  note-issuing  function  of  the  banks. 

In  his  annual  report  for  1887,  Mr.  Trenholm  summarized 
these  various  propositions  under  five  headings,  eliminating  such 
as  contemplated  a  gold  or  silver  deposit  as  security  for  circula- 
tion. Only  three  of  the  five  plans  suggested  he  regarded  as  com- 
ing within  the  range  of  probable  adoption,  viz. : 

1.  To   increase   the   inducements   for   the   banks   to   deposit 
United  States  bonds  as  a  basis  for  national  bank  circulation. 

2.  To  provide  by  a  new  issue  of  bonds  for  a  continuance  of 
the  present  or  some  modified  system  of  national  bank  circulation 
based  upon  the  security  of  United  States  bonds. 

3.  To  allow  the  banks  to  issue  circulation  upon  their  general 
credit,  without  requiring  specific  security  to  be  deposited. 

After  first  presenting  his  views  as  to  some  of  the  obstacles 
which  surrounded  the  adoption  of  either  of  these  propositions, 
as  affecting  the  interests  of  the  Government,  the  banks,  and  the 


134  ROMANCE  AND  TRAGEDY  OF  BANKING 

public,  Mr.  Trenholm  then  proceeded  to  analyze  their  relative 
merits  from  his  point  of  view. 

The  refunding  operations  of  the  Treasury  Department  in 
United  States  bonds,  and  subsequent  legislation  increasing  the 
amount  of  circulation  that  might  be  issued  from  ninety  per  cent, 
to  the  par  of  the  bonds  deposited,  accomplished  in  a  measure  some 
of  the  objects  sought  to  be  attained  by  the  first  and  second  of  the 
suggestions  quoted,  leaving  only  the  third  as  having  any  bearing 
on  the  conditions  then  existing  and  the  proposed  amendments  to 
the  currency  laws. 

In  regard  to  this  proposition,  Mr.  Trenholm  expressed  the 
view  that  it  was  very  doubtful  whether  the  strong  and  conserva- 
tively managed  banks  would  be  disposed  to  jeopardize  their  credit 
with  their  depositors  by  issuing  circulation  secured  by  a  first  lien 
upon  the  assets  of  the  bank,  thus  making  the  noteholder  a  pre- 
ferred creditor  over  the  depositor  and  weakening  his  security  to 
that  extent.  Mr.  Trenholm  expressed  the  further  view  that  if 
such  a  proposition  were  adopted  the  circulating  notes  issued 
under  such  conditions  would  be  chiefly  to  banks  having  a  small 
line  of  deposits,  whose  assets  were  of  such  an  uncertain  character 
as  to  constitute  a  very  poor  security,  even  as  a  first  lien  for 
circulation. 

The  circulating  notes  of  a  bank  based  upon  the  security  of 
its  credit,  he  said,  are,  of  course,  no  better  than  the  assets  of  the 
association  issuing  the  notes,  plus  the  individual  liability  of  its 
shareholders.  Under  the  system  of  bond-secured  circulation,  the 
notes  of  the  weakest  bank  were  as  good  as  those  of  the  strongest. 
The  relative  strength  of  the  banks  in  nowise  affected  the  security 
of  their  notes.  Under  an  asset  or  credit  currency  system,  the 
reverse  would  be  the  case,  and  the  inability  of  a  few  associations 
to  redeem  their  circulation  in  full  in  the  event  of  insolvency,  would 
have  the  effect  of  discrediting  the  note  issues  of  a  large  number 
of  banks,  especially  those  of  the  smaller  capital  class,  which  under 
a  bond-secured  circulation  were  accepted  at  par,  without  ques- 
tion, in  any  part  of  the  United  States.  He  expressed  the  belief 
that  it  would  require  but  a  few  failures  of  this  kind  to  bring  a 
return  of  the  conditions  which  existed  before  the  establishment  of 
the  national  banking  system,  in  respect  to  banknote  circulation. 


ROMANCE  AND  TRAGEDY  OF  BANKING  135 

Mr.  Trenholm  was  of  the  opinion  that  whatever  form  of  secur- 
ity for  bank  issues  should  ultimately  take  the  place  of  Govern- 
ment bonds,  in  whole  or  in  part,  a  safe  and  satisfactory  circula- 
tion, that  would  pass  current  in  every  section  of  the  country  with- 
out question,  would  have  to  rest  upon  something  of  more  confident 
stability  than  the  bare  credit  of  the  issuing  bank;  and  that  the 
confidence  of  depositors  in  the  banks  certainly  would  not  be  in- 
creased if  the  noteholder  were  made  a  preferred  creditor  over  the 
depositor,  as  was  contemplated  by  most  of  the  schemes  then  pre- 
sented, by  making  the  circulation  a  first  lien  upon  the  assets  of 
the  issuing  bank,  thus  lessening  the  security  of  the  depositor  to 
that  extent. 

Confidence  of  depositors  in  the  security  of  their  deposits  is 
as  essential  to  the  success  of  the  national  banking  system  as  the 
certainty  of  redemption  at  par  of  the  circulation  is  to  the  note- 
holder to  insure  the  passing  current  of  such  circulation  in  the 
hands  of  the  people  of  every  section  of  the  country. 

Plan  for  National  Currency  Reform 

Rand,  McNally's  Banking  Magazine  for  May,  1888,  contains 
an  interesting  article  contributed  by  Comptroller  Trenholm,  out- 
lining a  plan  for  national  currency  reform. 

This  plan  contemplated  the  formation  of  unions  among  the 
national  banks,  for  the  purpose  of  issuing  currency  based  on  their 
assets.  The  banks  forming  each  union  were  to  be  required  to 
have  in  the  aggregate  not  less  than  three  nor  more  than  ten 
millions  of  capital.  Each  bank  in  the  union  was  to  appoint  a 
deputy  and  the  deputies  were  to  form  a  board  of  control.  When 
the  deputies  had  convened  and  organized  the  union  they  were 
then  to  be  authorized  to  apply  to  the  Comptroller  of  the  Cur- 
rency for  registration. 

Each  bank  in  the  union  was  to  be  required  to  furnish  to  the 
board  of  control  a  certified  copy  of  the  resolution  of  its  stock- 
holders authorizing  the  association  to  enter  the  union,  and  bind- 
ing the  bank  to  make  the  notes  issued  by  the  union  a  first  lien  on 
all  the  assets  of  the  banks  forming  the  union. 


136  ROMANCE  AND  TRAGEDY  OF  BANKING 

Each  board  of  control  was  to  be  required  to  appoint  a  chair- 
man and  a  manager,  subject  to  the  approval  of  the  Comptroller 
of  the  Currency,  and  the  Comptroller  was  to  appoint  a  Register 
of  Currency,  subject  to  the  approval  of  the  board  of  control. 

The  Register  of  the  Currency  was  to  receive  circulation  from 
the  Comptroller  and  deliver  it  to  the  manager  of  the  union,  when 
the  latter  furnished  to  him  the  security  required,  consisting  of 
unmatured  business  paper  of  the  banks  to  an  amount  equal  to  not 
less  than  one  and  a  third  times  the  amount  of  the  currency  issued 
in  exchange  therefor. 

The  manager  was  to  receive  the  security  from  the  banks 
through  the  board  of  control,  and,  after  approving  its  solvency, 
turn  the  security  over  to  the  Register  and  receive  the  notes  issued 
thereon.  Before  the  currency  should  be  delivered  to  the  bank  the 
seal  of  the  union  was  required  to  be  imprinted  thereon.  This  seal 
was  to  be  in  two  parts,  one  part  to  be  in  the  custody  of  the  man- 
ager and  the  other  to  be  held  by  the  Register. 

The  plan  also  provided  various  regulations  as  to  the  manner 
in  which  the  business  of  the  board  of  control  should  be  conducted, 
the  deputies  appointed,  the  incomplete  circulation  prepared  in 
advance  under  the  supervision  of  the  Comptroller,  the  withdrawal 
and  substitution  of  business  paper  as  it  matured,  etc. 

In  addition  to  this  security,  a  redemption  fund  was  required 
to  be  maintained  with  the  Treasurer  of  the  United  States  equal  in 
amount  to  five  per  cent,  of  the  circulation  outstanding,  and  a 
reserve  fund  of  gold  coin  in  bank  equal  to  twenty  per  cent,  of 
such  circulation. 

Prevision  was  made  for  the  retirement  of  the  notes  of  the  in- 
solvent union  banks  by  the  deposit  of  lawful  money  in  the  Treas- 
ury of  the  United  States,  and  of  any  union  when  the  aggregate 
capital  of  the  banks  forming  such  union  became  reduced  from  any 
cause  to  less  than  the  amount  required,  or  when  dissolved  in  any 
other  way. 

Notes  were  not  to  be  issued  in  excess  of  three-fourths  of  the 
unimpaired  capital  of  the  banks  comprising  the  union,  and  were 
to  constitute  part  of  the  national  currency  authorized  by  law. 

The  foregoing  is  a  general  outline  of  the  currency  plan  pro- 
posed by  Mr.  Trenholm.  The  notes  issued  were  to  be  a  first  lien 


ROMANCE  AND  TRAGEDY  OF  BANKING  137 

on  all  the  assets  of  the  banks,  each  bank  being  to  the  extent  of  its 
assets  liable  for  all  the  notes  issued  by  any  of  the  other  banks 
composing  the  union. 

The  bill  reported  by  the  Banking  and  Currency  Committee  of 
the  House  of  Representatives  on  April  21,  1908,  known  as  "The 
Fowler  Bill,"  and  the  Federal  Reserve  Act  of  December  23,  1913, 
were  similar  in  some  of  their  features  to  the  plan  of  Comptroller 
Trenholm,  as  outlined  above. 

The  Fowler  Bill  proposed  to  create  a  Division  of  Banking  and 
Currency  in  the  Treasury  Department  to  take  the  place  of  the 
present  Bureau  of  the  Currency.  This  Division  was  to  be  in 
charge  of  a  board  of  control,  consisting  of  three  men.  This  board 
was  to  supersede  the  Comptroller  of  the  Currency,  and  was  to 
divide  the  country  at  large  into  clearing-house  districts.  Each 
district  was  to  have  a  clearing-house  city,  through  which  all  the 
circulating  notes  were  to  be  issued  to  the  banks  within  that 
district. 

The  Act  of  Congress  approved  May  30,  1908,  known  as  the 
Emergency  Currency  Law,  contained  a  similar  provision  to  that 
of  the  Trenholm  plan  and  the  Fowler  Bill,  for  the  division  of  the 
country  at  large  into  districts.  The  Act  referred  to  provided 
for  the  formation  of  currency  associations  by  banks  of  not  less 
than  ten  in  number,  with  an  unimpaired  capital  and  surplus  of 
not  less  than  five  millions  of  dollars.  The  noteholder  under  each 
of  these  plans  was  made  a  preferred  creditor. 

Comptroller  Trenholm  seems  to  have  modified  his  views  in 
regard  to  this  feature  of  his  plan,  as  they  are  inconsistent  with 
his  objections  to  such  a  preference  expressed  a  year  earlier  to 
the  same  proposition  presented  by  the  bankers. 

From  an  administrative  point  of  view  all  three  plans  were 
complicated  and  cumbersome,  so  far  as  affording  an  adequate 
means  for  a  speedy  and  automatic  expansion  and  contraction  of 
the  currency  were  concerned. 

Failure  of  the  Fidelity  National  Bank 

The  most  notable  bank  failure  that  occurred  during  Mr.  Tren- 
holm's  administration  was  that  of  the  Fidelity  National  Bank  of 


138  ROMANCE  AND  TRAGEDY  OP  BANKING 

Cincinnati,  Ohio,  which  closed  its  doors  June  21,  1887,  and  was 
placed  in  the  hands  of  David  Armstrong  as  receiver,  June  27. 

The  life  of  this  bank  was  spectacular  and  of  short  duration. 
It  was  organized  February  27,  1886,  by  E.  L.  Harper,  with 
Briggs  Swift  as  president,  Harper  as  vice-president  and  manager, 
and  Ammi  Baldwin  as  cashier.  It  had  a  capital  stock  of 
$1,000,000  and  during  the  brief  period  of  its  existence  of  less  than 
two  years  had  built  up  a  line  of  deposits  amounting  to  nearly  five 
millions  of  dollars.  The  success  of  this  institution  in  accumulat- 
ing such  a  large  amount  of  deposits  in  such  a  short  time  was  due 
to  the  payment  by  the  bank  of  four  per  cent,  interest,  which  had 
the  effect  of  attracting  funds  which  would  not  otherwise  have  been 
received.  Additional  inducements  were  offered  in  that  no  charge 
was  to  be  made  for  collections. 

While  this  bank  was  under  suspicion  by  the  Comptroller's 
office  for  several  weeks  before  its  failure,  the  Comptroller  had  no 
reason  to  believe  that  it  was  otherwise  than  in  a  solvent  condition, 
until  June  20,  1887,  when  he  received  notice  of  the  protest  in  New 
York  of  $200,000  of  its  drafts.  The  examiner  was  then  instructed 
to  make  an  immediate  examination  of  the  institution,  and  upon 
reporting  it  to  be  insolvent,  was  directed  to  close  its  doors  and 
take  possession.  Comptroller  Trenholm  went  at  once  to  Cincin- 
nati and  personally  directed  the  operations  of  the  examiner  and 
the  receiver.  The  failure  of  the  bank  was  due  to  the  reckless 
management  of  its  directors,  and  the  criminal  use  of  the  funds  of 
the  association  by  Harper  in  wheat  speculations  in  Chicago. 

The  claims  proved  under  the  receivership  of  this  association 
amounted  to  $4,344,281.  The  receiver  collected  from  its  assets 
$2,876,819.  The  stockholders  were  assessed  one  hundred  per 
cent.,  or  $1,000,000,  and  there  was  realized  from  this  source 
$319,170.  The  total  dividends  paid  creditors  amounted  to  $2,- 
610,351,  or  59.95  per  cent. 

While  this  trust  was  practically  closed  long  before  the  pay- 
ment of  the  supplemental  dividend  of  55/100  of  one  per  cent,  on 
January  13,  1909,  it  was  not  finally  closed  on  the  books  of  the 
Comptroller's  office  until  October  30,  1909.  The  delay  in  pay- 
ment of  the  supplemental  or  final  dividend  was  due  to  the  fact 
that  a  judgment  for  $7,000,000  was  obtained  against  E.  L. 


ROMANCE  AND  TRAGEDY  OF  BANKING  139 

Harper  by  the  receiver  of  the  Fidelity  Trust  Company  of  Cin- 
cinnati, and  the  remaining  funds  in  the  hands  of  the  receiver  were 
held  awaiting  the  satisfaction  of  this  judgment.  After  a  thor- 
ough investigation,  however,  no  attachable  property  belonging  to 
Harper  could  be  found,  and  the  judgment  was  finally  offered  for 
sale  by  Stanage  &  Company  of  Cincinnati  for  the  sum  of  $1000. 

Peculiar  Construction  of  the  Law 

Although  the  Comptroller  of  the  Currency  was  empowered 
by  law  to  close  and  appoint  a  receiver  for  any  national  bank 
known  to  be  insolvent,  at  the  time  of  the  failure  of  this  institution 
a  peculiar  construction  was  placed  upon  the  provision  in  Section 
5239  of  the  Revised  Statutes  of  the  United  States  by  the  Comp- 
troller's office.  This  section  authorizes  the  Comptroller  to  insti- 
tute a  suit  to  forfeit  the  charter  of  any  national  bank  whose  di- 
rectors knowingly  violate  or  knowingly  permit  to  be  violated  by 
any  of  the  officers  or  agents  of  the  association  any  of  the  pro- 
visions of  the  national  banking  laws ;  and  held  every  director  who 
participated  in  or  assented  to  such  violations  liable  in  his  per- 
sonal or  individual  capacity  for  all  damages  which  the  associa- 
tion, its  shareholders,  or  any  other  person  may  have  sustained  in 
consequence  thereof.  It  was  then  held  that  the  individual  liabil- 
ity of  the  directors  could  be  enforced  only  after  the  charter  of 
the  association  had  been  declared  forfeited  by  a  United  States 
Court.  Suit  was  therefore  instituted  in  the  name  of  the  Comp- 
troller to  dissolve  this  corporation  after  it  had  been  practically 
dissolved  by  being  placed  in  the  hands  of  a  receiver.  A  decree 
was  issued  by  the  United  States  Circuit  Court  for  the  Southern 
District  of  Ohio,  on  July  12,  1887,  declaring  the  charter  of  the 
association  forfeited,  and  upon  the  basis  of  this  decree  suit  was 
brought  by  the  receiver  against  every  director  of  the  bank  impli- 
cated in  the  violations  of  law  complained  of. 

Since  that  time  the  courts  have  held  that  the  forfeiture  of  the 
charter  of  a  bank  in  a  suit  brought  by  the  Comptroller  of  the 
Currency  for  that  purpose  is  not  a  condition  precedent  to  the 
maintenance  of  a  suit  against  directors  for  damages  resulting 
from  violations  of  law.  The  course  pursued  by  Comptroller 


140  ROMANCE  AND  TRAGEDY  OF  BANKING 

Trenholm,  therefore,  has  not  since  been  followed  by  the  Comp- 
troller's office,  and  the  case  of  the  Fidelity  National  Bank  of  Cin- 
cinnati is  one  of  the  rare  instances  in  which  forfeiture  of  charter 
proceedings  were  instituted  by  the  Comptroller  of  the  Currency 
for  violations  of  law. 


Criticisms  of  Official  Supervision  of  the  Banks 

Whenever  a  national  bank  has  failed,  no  matter  from  what 
cause,  the  system  of  official  supervision  by  the  Comptroller  of  the 
Currency,  or  of  examination  by  a  national  bank  examiner,  has 
been  subject  to  more  or  less  criticism  by  the  public  in  general  and 
by  the  creditors  and  stockholders  of  the  failed  association  in 
particular.  The  failure  of  the  Fidelity  National  Bank  was  no 
exception  to  this  rule.  The  national  bank  examiner  was  severely 
criticised  for  not  sooner  discovering  and  reporting  the  true  con- 
dition of  the  bank's  affairs,  and  the  Comptroller  was  censured 
for  not  having  closed  the  association  before  it  reached  the  condi- 
tion disclosed  by  the  failure.  While  the  facts  were,  there  was 
neither  incompetency  nor  negligence  on  the  part  of  the  examiner, 
nor  dereliction  of  duty  nor  undue  leniency  on  the  part  of  the 
Comptroller.  Each  performed  his  duty  to  the  best  of  his  ability, 
with  such  knowledge  of  the  situation  as  it  was  possible  to  obtain, 
and  within  the  limitations  of  law.  In  those  days  administrative 
officials  were  not  accustomed  to  the  modern  methods  of  usurping 
the  functions  of  Congress  by  arbitrarily  exercising  powers  not 
conferred  upon  them  by  statute.  They  were  content  in  the  dis- 
charge of  their  duty,  as  they  understood  it,  within  the  limitations 
of  law  and  in  placing  the  responsibility  for  conditions  beyond 
their  control  where  it  properly  belonged  upon  incompetent  or 
fraudulent  bank  management  or  in  defective  statutes  which  pro- 
vided no  adequate  means  of  preventing  the  unsatisfactory  condi- 
tions which  ultimately  led  to  bank  failures.  An  administrative 
official  is  sworn  to  execute  the  law  as  it  exists,  and  if  he  discharges 
his  duty  in  this  respect  he  cannot  properly  be  held  accountable 
for  inadequacies  of  the  statutes,  or  be  expected  to  supply  their 
defects  by  unauthorized  administrative  regulations. 


ROMANCE  AND  TRAGEDY  OF  BANKING  141 

Intelligent  discussion  in  the  public  prints  of  the  manner  in 
which  administrative  officers  discharge  their  duties  is  generally 
wholesome  and  is  frequently  productive  of  beneficial  results.  Er- 
roneous criticism,  based  as  it  usually  is  upon  ignorance  of  both 
the  law  and  the  facts,  is  not  only  unjust  to  the  official  against 
whom  it  is  directed,  but  is  misleading  and  therefore  accomplishes 
no  good  purpose.  And  such  generally  has  been  the  nature  of  the 
criticisms  in  connection  with  almost  every  national  bank  failure. 

The  Chicago  Wheat  Deal 

The  failure  of  the  Fidelity  National  Bank  of  Cincinnati  was 
the  result  of  Harper's  speculations  in  the  Chicago  wheat  market. 
He  is  reported  to  have  commenced  his  operations  in  1886,  the 
same  year  in  which  the  bank  was  organized,  and  to  have  used  every 
dollar  of  the  available  resources  of  the  bank  to  support  the  efforts 
of  himself  and  those  who  were  associated  with  him  to  corner  the 
wheat  market. 

It  appears  from  the  records  of  the  Comptroller's  office  and 
the  written  history  of  this  wheat  deal,  published  at  the  time,  that 
for  several  years  previously  California  wheat  cargoes  had  been  a 
dead  weight  upon  the  market,  and  it  was  understood  that  some 
prominent  capitalists  of  that  State  had  secured  control  of  the 
California  supply  for  the  purpose  of  bulling  the  market.  This 
fact,  and  the  prospect  of  a  diminished  wheat  crop  together  with 
an  active  export  demand,  were  regarded  as  a  favorable  time  for  a 
successful  bull  campaign.  Harper  and  his  associates  readily  rec- 
ognized these  conditions,  and  in  December,  1886,  were  reported 
to  have  bought  thirty  million  bushels  of  wheat.  But  the  move- 
ment does  not  appear  to  have  been  a  success,  as  the  January  and 
February  wheat  receipts,  which  were  usually  light,  proved  to  be 
unexpectedly  full.  In  consequence,  Harper  was  compelled  to  dis- 
pose of  half  of  his  holdings,  which  left  him  with  fifteen  million 
bushels  on  hand.  During  the  early  part  of  March  of  that  year 
other  big  operators  of  Chicago  made  two  raids  on  the  market, 
selling  millions  of  bushels  short,  all  of  which  were  taken  up  and 
held  by  some  unknown  parties.  This,  it  was  stated,  was  the 
foundation  of  the  great  short  interest  that  was  later  cornered  by 


142  ROMANCE  AND  TRAGEDY  OF  BANKING 

Harper  and  his  associates.  It  was  estimated  that  this  short 
interest  in  May  following  amounted  to  one  hundred  millions  of 
bushels,  and  made  up  what  was  called,  in  the  parlance  of  the  mar- 
ket, the  "shorts"  of  the  Chicago  "bears,"  and  the  "Farmer 
shorts,"  against  which  an  invisible  supply  was  held.  In  addition 
to  this,  all  the  markets  of  the  country,  as  well  as  the  foreign  oper- 
ators, were  reported  as  making  Chicago  the  dumping-ground  for 
their  short  sales. 

It  was  at  this  period  that  Harper  is  reported  to  have  begun 
his  bold  movement  to  corner  the  market,  and  in  this  desperate 
venture  to  have  staked  his  individual  fortune  and  all  the  available 
resources  of  the  Fidelity  National  Bank.  Who  his  associates 
were,  never  has  been  definitely  known,  and  it  was  not  even  known 
that  he  was  the  head  and  front  of  the  movement  until  the  corner 
collapsed.  The  brokers  through  whom  he  operated  were  well 
known,  but  the  principals  for  whom  they  were  operating  remained 
in  the  background.  It  was  known  that  large  orders  were  received 
from  brokers  in  Cincinnati,  but  it  was  not  known  whom  they 
represented. 

In  the  latter  part  of  April,  Harper  and  his  associates  were 
reported  as  having  carried  about  45,000,000  bushels  of  May 
wheat.  May  was  to  have  been  the  corner  month,  but  this  was 
found  to  be  impracticable,  and  it  was  decided  to  carry  the  corner 
over  to  June.  Thirty  million  bushels  of  May  wheat  were  sold 
and  about  the  same  amount  of  June  wheat  was  bought,  and  the 
Harper  interests  traded  the  remainder  of  their  May  wheat  for 
June  wheat,  paying,  it  was  said,  two  and  one-half  cents  a  bushel 
to  the  brokers  for  carrying  it.  The  thirty  million  bushels  of  June 
wheat  were  bought  at  eighty-two  and  eighty-four  cents  per 
bushel,  when  June  wheat  was  quoted  at  ninety-two  cents.  Early 
in  March  it  was  quoted  at  eighty  cents.  The  highest  price  reached 
was  ninety-four  and  three-quarters  cents. 

The  resources  of  the  Harper  combination  seemed  to  be  inex- 
haustible. Their  purchases  for  ten  consecutive  days  were  esti- 
mated at  a  million  bushels  a  day.  This,  added  to  what  they  al- 
ready held,  made  their  total  holdings  75,000,000  bushels,  and  may 
have  exceeded  that  amount.  Harper  was  reported  as  employing 
three  million  dollars  in  carrying  this  wheat. 


ROMANCE  AND  TRAGEDY  OF  BANKING  143 

In  March,  some  Texas  capitalists  bought  about  two  million 
bushels  of  June  wheat  at  eighty  cents,  which  was  unloaded  on 
the  Harper  combination  at  eighty-five  and  seven-eighths  cents. 
Up  to  this  time  Harper  and  his  associates  had  made  some  sweep- 
ing operations  and  were  reported  as  having  made  considerable 
money.  Many  operators  who  sold  short  had  suffered  severely, 
and  the  retirement  of  one  large  New  York  house  from  active  busi- 
ness at  this  time  was  said  to  have  been  due  to  losses  sustained  in 
wheat.  In  the  meantime,  the  Harper  interests  continued  to  buy 
all  the  wheat  that  was  offered.  Their  nerve  seemed  to  be  as  un- 
daunted as  their  resources  appeared  to  be  inexhaustible. 

On  June  14  the  great  corner  collapsed.  Several  causes  con- 
tributed to  this  end.  It  appears  that  it  was  the  practice  for 
wealthy  farmers  to  sell  wheat  for  delivery  in  a  future  month  and 
hold  the  wheat  in  their  barns  against  the  sale.  When  there  was 
a  corner  in  the  market,  this  invisible  supply  was  brought  forth 
from  numerous  localities  until  all  the  warehouses  and  elevators 
recognized  by  the  board  of  trade  became  filled.  At  this  point, 
those  engaged  in  the  cornering  of  the  supply  had  their  firmest 
hold  upon  the  market.  Trains  and  boats  could  bring  in  wheat, 
but  unless  this  additional  grain  could  be  gotten  into  a  recognized 
warehouse  or  elevator  and  duly  inspected,  it  could  not  be  deliv- 
ered on  contract.  The  supply  of  cash  wheat  could  only  be  in- 
creased under  such  conditions  by  the  creation  of  additional  ware- 
houses and  elevators  and  their  recognition  by  the  board  of  trade. 
This  is  what  happened  in  Chicago,  and  was  one  of  the  chief  causes 
that  brought  about  the  collapse  of  the  Harper  corner.  The  board 
of  trade  not  only  recognized  new  elevators  and  warehouses  that 
had  been  filled  with  wheat,  and  declared  them  to  be  regular,  but 
it  was  proposed  to  make  track  grain  regular  also  when  it  was 
impossible  to  find  storage  room. 

The  stock  of  contract  wheat  in  Chicago  at  that  time  consisted 
of  15,512,700  bushels  No.  2  spring,  and  963,268  bushels  No.  2 
red.  If  the  board  of  trade  had  declared  track  grain  regular,  the 
Harper  combination  would  have  had  to  take  care  of  two  or  three 
million  bushels  more,  which  would  have  been  too  great  a  tax  upon 
its  resources.  At  this  time  New  York  operators  began  to  buy 
December  and  May  wheat  in  New  York  and  to  sell  July  and 


144  ROMANCE  AND  TRAGEDY  OF  BANKING 

August  wheat  in  Chicago.  This  movement  is  said  to  have  weak- 
ened the  Harper  combination  and  strained  its  resources  to  the 
breaking-point.  It  was  at  this  critical  stage  of  the  situation  that 
Harper  is  reported  to  have  conceived  the  scheme  of  unloading  his 
burden  on  his  broker  and  then  abandoning  him,  as  he  was  reported 
to  have  done  several  years  earlier  in  his  previous  dealings  in  the 
wheat  market.  At  any  rate,  the  broker  having  received  instruc- 
tions, placed  his  celebrated  order  to  buy  5,000,000  bushels  at 
ninety-three  cents,  and  3,300,000  bushels  were  sold  to  him,  it  was 
alleged,  by  Harper's  other  broker,  and  when  the  former  discov- 
ered the  situation,  he  called  his  representatives  out  of  the  pit  and 
stopped  the  buying. 

Another  contributing  cause  to  the  collapse  of  the  deal  was  the 
fact  that  several  of  the  New  York  banks  had  called  the  loans  to 
Harper  and  his  associates. 

When  the  market  broke  it  was  a  tremendous  crash.  Nothing 
approaching  it  had  ever  been  known  in  Chicago.  June  wheat 
broke  from  ninety-two  cents  to  seventy-two  cents,  and  July  wheat 
from  eighty-three  and  a  quarter  cents  to  seventy-four  cents. 
About  a  dozen  or  more  brokerage  houses  failed  and  the  entire 
market  was  involved  in  a  heavy  loss.  Harper  had  staked  every- 
thing he  possessed,  his  individual  wealth,  the  resources  of  the 
Fidelity  National  Bank,  his  reputation,  and  his  personal  liberty, 
upon  the  hazard  of  a  die  and  lost.  All  were  involved  in  the  suc- 
cess or  failure  of  the  greatest  wheat  speculation  that  ever  was 
known.  He  paid  the  penalty  for  his  misdeeds  in  connection  with 
the  misapplication  of  the  funds  of  the  bank  by  serving  a  term  in 
the  Ohio  penitentiary. 

Suggested  Amendments  to  the  Law 

In  his  first  annual  report  to  Congress  Mr.  Trenholm  sub- 
mitted a  number  of  suggestions  for  amendments  to  the  banking 
laws.  He  took  the  position  that  as  the  interests  of  the  Govern- 
ment in  connection  with  the  issue  and  redemption  of  the  circula- 
tion of  the  banks  were  fully  protected  and  the  noteholders  were 
absolutely  secured,  official  supervision  of  the  banks  was  reduced 
to  the  necessity  of  protecting  the  interests  of  depositors  and  cred- 
itors other  than  noteholders.  He  stated  that  as  the  security  of 


ROMANCE  AND  TRAGEDY  OF  BANKING  145 

the  depositor  was  dependent  upon  the  proportion  of  the  bank's 
assets  to  its  liabilities  and  the  solidity  of  such  assets,  both  of 
which  were  in  turn  dependent  upon  the  management  of  the  bank, 
official  supervision  of  the  management  of  every  national  bank  by 
the  Comptroller  of  the  Currency  had  become  a  very  important 
and  necessary  feature  of  the  national  system.  For  this  reason  he 
was  of  the  opinion  that  the  laws  governing  supervision,  and  the 
character  of  the  business  that  may  be  done  by  the  banks,  should 
be  frequently  revised,  in  order  that  the  interests  of  both  may  be 
benefited  by  the  light  of  experience. 

That  such  revision  of  the  laws  was  not  made  from  time  to 
time  is  not  the  fault  of  the  Comptrollers,  nor  of  the  best  minds 
among  the  bankers.  Numerous  amendments  of  the  laws  had  been 
suggested  by  both,  the  adoption  of  some  of  which  have  no  doubt 
greatly  improved  the  system,  but  the  known  ambiguities  and 
inadequacies  of  many  of  the  most  important  provisions  of  the 
law  remained  unchanged  since  the  original  enactment,  until  in 
some  sections  of  the  country  it  had  become  almost  impossible  for 
banks  in  the  national  system  to  meet,  within  the  limitations  of 
law,  the  legitimate  business  demands  of  their  customers  in  com- 
petition with  the  best  class  of  State  institutions  operating  in  the 
same  locality. 

The  national  banking  laws  were  all  right  in  the  main,  but 
they  did  not  keep  pace  with  the  evolutions  of  business  and  bank- 
ing. Greater  latitude  to  the  banks  was  needed  in  some  respects ; 
increased  restrictions  in  others.  Had  the  necessary  changes  been 
made  in  the  law,  as  recommended  from  time  to  time  by  Comp- 
trollers, the  national  system  would  have  been  steadily  improved, 
both  in  the  interests  of  the  banks  and  the  better  security  of  their 
depositors. 

Mr.  Trenholm,  like  all  of  his  predecessors,  readily  recognized 
the  defects  in  the  banking  statutes  and  endeavored  to  have  them 
corrected.  In  his  first  annual  report  he  submitted  a  number  of 
specific  recommendations  for  amendments  to  the  law,  the  most 
important  of  which  were  the  following: 

That  the  limitations  with  respect  to  the  dealings  of  the  banks 
in  real  estate  and  real  estate  mortgages  be  more  clearly  and  defi- 
nitely expressed,  and  a  penalty  provided  for  violation  of  the  law. 


146  ROMANCE  AND  TRAGEDY  OF  BANKING 

That  not  less  than  five  directors  of  a  bank,  exclusive  of  the 
vice-president  and  cashier,  be  required,  when  such  officers  were 
members  of  the  board. 

That  the  shareholders  of  the  bank  be  exempted  from  further 
liability  when  the  surplus  of  the  association  should  exceed  twenty 
per  cent,  of  the  paid-in  capital  stock  of  the  bank. 

That  the  banks  be  required  to  keep  on  hand,  or  at  some  nearby 
center,  a  larger  proportion  of  reserve  than  was  then  required  by 
existing  law. 

That  the  banks  be  permitted  to  exceed  the  limit  placed  upon 
loans  when  security  of  undoubted  value  was  held  for  a  loan,  which 
security  was  not  in  any  way  dependent  for  its  ready  convert- 
ibility upon  the  borrower. 

That  the  compensation  of  bank  examiners  be  based  upon  the 
aggregate  liabilities  of  the  bank,  instead  of  upon  capital  stock, 
and  that  the  appointment  of  supervising  examiners  be  authorized, 
to  be  paid  out  of  the  Treasury  of  the  United  States. 

That  the  assistant  cashier  of  a  bank  be  authorized,  in  the 
absence  or  inability  of  the  cashier,  to  sign  all  certificates  then 
required  to  be  signed  by  the  cashier. 

That  provision  be  made  for  the  protection  of  the  rights  of 
shareholders  desiring  to  withdraw  from  national  banks  extending 
their  corporate  existence. 

In  his  report  for  1887,  Mr.  Trenholm  recommended  a  revision 
of  the  entire  National  Bank  Act,  and  embodied  his  views  in  the 
form  of  a  prepared  bill,  containing  242  sections,  codifying  exist- 
ing laws,  with  such  modifications  and  additional  provisions  as  he 
deemed  essential. 

In  his  third  and  last  annual  report,  Mr.  Trenholm  called  at- 
tention to  the  gradual  and  continuous  contraction  in  national 
bank  circulation  that  had  taken  place  during  the  preceding  ten 
years.  He  stated  that  the  influences  principally  responsible  for 
such  contraction  were  the  refunding  operations  of  the  Treasury 
Department  in  United  States  bonds,  the  growing  scarcity  and 
high  price  of  the  bonds,  the  resumption  of  specie  payments  in 
January,  1879,  made  possible  only  by  the  co-operative  relations 
between  the  Treasury  Department  and  the  national  banks,  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  147 

displacement  of  national  bank  notes  by  other  forms  of  money; 
the  silver  coinage  law  of  1878,  providing  for  the  coinage  of  two 
millions  of  silver  dollars  a  month,  and  the  silver  certificates  auth- 
orized by  the  Act  of  August  4,  1886,  which  were  absorbed  by  the 
public  because  they  constituted  the  only  supply  of  notes  of  small 
denominations. 

While  all  these  influences,  Mr.  Trenholm  declared,  had  the 
effect  of  increasing  the  total  volume  of  money  in  circulation 
$660,000,000  between  January,  1879,  and  October,  1888,  the 
date  of  his  report,  the  national  bank  circulation  during  the  same 
period  showed  a  shrinkage  of  nearly  $83,500,000. 

Heterogeneous  Currency  System 

Mr.  Trenholm  regarded  the  greenbacks,  or  United  States 
notes,  as  the  frailest  element  in  our  heterogeneous  currency  sys- 
tem, and  in  classifying  the  money  of  the  country  in  the  order  of 
its  value,  placed  the  gold  coin  and  gold  certificates  first,  the 
national  bank  circulation  second,  silver  coin  and  silver  certifi- 
cates next,  and  the  greenbacks  last,  and  suggested  that  it  would 
be  of  great  benefit  to  the  whole  mass  of  our  currency  if  the  green- 
backs could  be  eliminated  and  national  bank  notes  substituted  in 
their  place. 

He  then  recommended  the  retirement  of  the  $346,000,000  of 
greenbacks  by  funding  the  debt  into  bonds,  or  so  much  of  it  as 
should  be  presented  at  the  Treasury  within  a  limited  period.  Such 
bonds  were  to  be  issued  to  national  banks  only  in  exchange  for 
greenbacks,  and  were  to  bear  a  low  rate  of  interest,  not  exceeding 
two  and  one-half  per  cent.  These  bonds  were  to  mature  only 
upon  the  failure  or  liquidation  of  the  banks  owning  them,  and  be 
available  only  as  security  for  national  bank  circulation.  The 
banks  were  to  be  required  to  retain  on  deposit  with  the  Treas- 
urer of  the  United  States  other  bonds  to  the  minimum  amount 
provided  by  existing  laws,  and  to  use  the  new  bonds  only  for  pro- 
curing additional  circulation,  or  in  substitution  for  other  bonds 
on  deposit  in  excess  of  the  minimum,  but  the  new  bonds  were  to 
be  available  for  all  purposes  by  banks  organized  after  the  passage 
of  the  Act. 


148  ROMANCE  AND  TRAGEDY  OF  BANKING 

He  recommended  the  transfer  of  the  National  Bank  Redemp- 
tion Agency  from  Washington  to  New  York  City,  and  the  crea- 
tion of  a  sub-agency  at  each  central  reserve  city,  the  notes  of  all 
the  banks  wherever  located  to  be  redeemed  at  whichever  agency 
they  should  be  presented.  He  then  expressed  his  views  at  length 
in  support  of  these  suggestions  and  the  belief  that  the  retirement 
of  the  greenbacks  would  restore  the  national  banking  system  to 
healthy  activity  and  stimulate  it  to  fresh  growth  in  sections  of 
the  country  where  national  banks  were  most  needed. 


Amendments  to  the  Law 

During  Mr.  Trenholm's  administration  four  amendments  to 
the  national  banking  laws  were  passed,  as  follows : 

The  Act  of  May  1,  1886,  providing  that  any  national  bank- 
ing association  might  by  a  vote  of  its  shareholders  owning  two- 
thirds  of  the  stock,  and  with  the  approval  of  the  Comptroller, 
increase  its  capital  to  any  sum  approved  by  the  Comptroller, 
notwithstanding  the  limit  fixed  in  its  original  articles  of 
association. 

This  Act  also  provided  that  any  association  might  change  its 
name  or  place  where  its  operations  were  carried  on  to  any  other 
place  within  the  same  State  not  more  than  thirty  miles  distant, 
with  the  approval  of  the  Comptroller  and  by  the  vote  of  share- 
holders owning  two-thirds  of  the  stock. 

Until  the  passage  of  this  Act,  if  a  bank  desired  to  remove  its 
place  of  business  or  change  its  name,  it  was  necessary  in  every 
instance  to  obtain  a  special  Act  of  Congress. 

The  Act  of  March  3,  1887,  defined  the  jurisdiction  of  Circuit 
Courts  of  the  United  States  and  declared  that  all  national  banks 
were  to  be  deemed  citizens  of  the  States  in  which  they  were  re- 
spectively located,  and  that  the  Circuit  and  District  Courts  of 
the  United  States  should  not  have  jurisdiction  other  than  such 
as  they  would  have  in  cases  between  individual  citizens  of  the 
same  State. 

Prior  to  the  passage  of  this  Act  the  United  States  Courts 
had  jurisdiction  in  all  cases  in  which  national  banks  were  a  party. 


ROMANCE  AND  TRAGEDY  OF  BANKING  149 

The  Act  of  March  3,  1887,  provided  for  the  creation  of  addi- 
tional reserve  cities  on  application  of  three-fourths  in  number 
of  the  national  banks  located  in  any  city  having  a  population  of 
fifty  thousand  people,  and  made  the  same  provision  for  the  crea- 
tion of  additional  central  reserve  cities.  The  latter,  however, 
required  the  approval  of  the  Secretary  of  the  Treasury. 

The  Act  of  August  13,  1888,  simply  determined  the  jurisdic- 
tion of  the  Circuit  Courts  of  the  United  States,  and  as  far  as  the 
national  banks  were  concerned,  made  no  change  in  the  Act  of 
March  3,  1887. 


EDWARD  S.  LACEY 
Comptroller  of  the  Currency,  1889-1892 


CHAPTER  IX 

Edward  S.  Lacey 

UPON  the  resignation  of  Mr.  Trenholm,  President  Cleveland, 
a  few  weeks  before  the  close  of  his  first  term,  nominated 
the  Deputy  Comptroller  of  the  Currency,  Jesse  D.  Abra- 
hams, to  be  Comptroller,  but  the  Senate  took  no  action  on  the 
nomination,  and  the  office  remained  vacant  until  May  1,  1889, 
when  Edward  S.  Lacey,  of  Michigan,  was  appointed  Comptroller 
by  President  Benjamin  Harrison. 

Mr.  Lacey,  the  seventh  Comptroller  of  the  Currency,  was  born 
at  Chili,  N.  Y.,  November  26,  1835.  He  removed  to  Michigan  in 
1842,  and  was  educated  at  the  public  schools  and  at  Olivet  Col- 
lege. He  was  elected  Register  of  Deeds  of  Charlotte,  Mich.,  in 
1860,  and  was  re-elected  in  1862.  He  was  trustee  of  the  Michi- 
gan State  Insane  Asylum  from  1874  to  1880,  and  was  a  delegate 
to  the  Republican  National  Convention  in  1876.  He  was  elected 
a  Representative  from  the  Third  District  of  Michigan  to  the 
Forty-seventh  and  Forty-eighth  Congresses.  Previous  to  his  ap- 
pointment as  Comptroller  he  had  had  a  practical  banking  experi- 
ence of  twenty-five  years,  and  at  the  time  of  his  appointment  was 
president  of  the  First  National  Bank  of  Charlotte,  Mich.,  which 
he  assisted  in  organizing  in  1870,  and  was  its  first  cashier.  He 
resigned  the  office  of  Comptroller  on  June  30,  1892,  to  become 
president  of  the  Bankers  National  Bank  of  Chicago,  which  he 
organized,  and  continued  to  be  its  president  until  August  31, 

1909,  when  this  bank  was  merged  with  the  Commercial  National 
Bank  of  Chicago.     George  E.  Roberts,  president  of  the  latter 
institution,  was  made  president  of  the  consolidated  bank,  and  Mr. 
Lacey  was  made  chairman  of  the  board  of  directors.    On  July  30, 

1910,  the  Commercial  National  Bank  was  merged  with  the  Conti- 
nental National,  under  the  title  of  the  Continental  and  Commer- 
cial National  Bank,  and  Mr.  Lacey  continued  his  connection  with 
this  institution  as  a  director  and  chairman  of  the  advisory  com- 

161 


152  ROMANCE  AND  TRAGEDY  OF  BANKING 

inittee  of  the  board  until  the  date  of  his  death,  October  2,  1916, 
at  Evanston,  111. 

Mr.  Lacey  came  to  the  office  of  Comptroller  of  the  Currency 
thoroughly  equipped  for  the  discharge  of  its  responsible  and 
onerous  duties,  not  only  as  a  practical  banker,  but  as  an  experi- 
enced legislator.  He  was  a  man  of  reserved  disposition,  extremely 
cautious  and  ultra-conservative;  scrupulously  conscientious  in 
the  discharge  of  his  duties  and  in  every  business  detail,  slow  in 
bestowing  his  confidences,  but  unlimited  in  his  trust  when  once 
his  confidence  was  obtained. 


Monetary  Stringency  of  1890 

The  second  year  of  Mr.  Lacey's  incumbency  of  the  office  of 
Comptroller  was  marked  by  the  monetary  stringency  of  1890, 
the  approach  of  which  was  plainly  manifest  in  the  early  spring 
of  that  year. 

In  commenting  upon  the  conditions  which  existed  throughout 
the  country  immediately  preceding  the  culmination  of  this  strin- 
gency, Mr.  Lacey,  in  his  annual  report  to  Congress  for  1890, 
stated  that  the  agricultural  interests  were  in  an  unsatisfactory 
condition  and  that  overtrading  and  unhealthful  expansion  were 
apparent  everywhere.  The  activity  in  railroad  development 
forced  upon  the  markets  large  lines  of  securities.  Attractive 
investments  in  real  estate,  farm  mortgages,  manufacturing  opera- 
tions, stocks  and  bonds  of  electric,  water  and  light  power  plants, 
and  many  other  lines  of  industry,  drew  large  amounts  of  capital 
theretofore  loanable  in  the  East  from  the  Atlantic  Coast  States 
to  the  Middle  West  and  Pacific  Coast,  and  likewise  from  abroad. 
This,  Mr.  Lacey  stated,  not  only  largely  depleted  the  Atlantic 
States  of  the  capital  necessary  to  carry  on  manufacturing  and 
other  legitimate  enterprises  of  that  section,  but  had  the  effect  of 
unduly  stimulating  speculative  operations  in  the  West  and  of 
laying  the  foundation  for  the  collapse  in  prices  and  values  which 
followed  when  the  inflow  of  capital  was  arrested  or  ceased  to  be 
available.  As  a  result,  the  banks  in  these  sections  became  more 
or  less  involved  through  their  customers,  and  so  badly  extended 


ROMANCE  AND  TRAGEDY  OF  BANKING  153 

as  to  compel  them  to  rediscount  heavily  with  their  reserve  city 
correspondents  in  order  to  carry  the  burden. 

Similar  conditions,  Mr.  Lacey  stated,  of  undue  expansion  ex- 
isted abroad,  and  in  anticipation  of  a  monetary  stringency  in 
England,  large  amounts  of  American  securities  held  by  European 
investors  were  forced  upon  the  New  York  market.  The  failure 
of  the  Panama  Canal  Company  and  the  French  Copper  Company 
had  already  forced  the  continental  countries  of  Europe  through 
a  period  of  liquidation  and  loss. 

During  the  months  of  June,  July  and  August  of  1890,  the 
net  exportations  of  gold  and  bullion  from  the  United  States  ex- 
ceeded fourteen  millions  of  dollars,  and  from  January,  1890,  to 
August,  1891,  the  gold  exportations  amounted  to  over  seventy- 
five  millions. 

Between  February  and  May,  1890,  the  gross  deposits  of  the 
forty-six  banks  in  New  York  City  fell  off  nearly  forty-five  mil- 
lions of  dollars,  due  to  the  demands  of  the  interior  banks. 

This  stringency  culminated  about  the  middle  of  November  in 
New  York,  by  the  failure  of  J.  C.  Wallcott  &  Company,  a  leading 
brokerage  firm,  and  the  North  River  Bank,  a  State  institution. 
The  Bank  of  North  America  became  involved,  and  at  the  same 
time  announcement  was  made  of  the  embarrassment  of  Baring 
Brothers  &  Company,  of  London,  whose  obligations  were  guaran- 
teed to  the  extent  of  seventy-five  millions  of  dollars  by  a  syndi- 
cate headed  by  the  Bank  of  England.  Other  failures  followed, 
both  in  New  York  and  Philadelphia. 

The  unfavorable  conditions  in  the  United  States  were  height- 
ened by  the  greatly  reduced  yield  of  wheat,  oats  and  corn  and  the 
prevailing  low  prices  for  these  commodities.  The  new  tariff  law 
which  went  into  effect  in  October,  1890,  also  operated  as  a  dis- 
turbing factor  by  stimulating  importations  in  anticipation  of  the 
higher  duties  imposed  by  the  Act. 

The  available  surplus  in  the  Treasury  of  the  United  States 
was  almost  completely  exhausted  in  an  endeavor  on  the  part  of 
the  Secretary  to  relieve  the  monetary  stringency,  and  over  ninety 
million  dollars  of  Government  funds  were  disbursed  between  July 
and  November,  1890,  by  the  purchase  of  United  States  bonds  and 
the  payment  of  interest  thereon.  As  is  usual  in  periods  of  mone- 


154          ROMANCE  AND  TRAGEDY  OF  BANKING 

tary  stringency,  the  banks  of  the  metropolitan  cities  were  subject 
to  pressing  demands  for  relief  and  the  Clearing  House  Associa- 
tions of  New  York,  Philadelphia  and  Boston  were  compelled  to 
have  recourse  to  the  expedient  so  successfully  resorted  to  during 
the  panics  of  1873  and  1884,  of  issuing  Clearing  House  loan  cer- 
tificates. This  action,  together  with  the  large  disbursements  of 
the  United  States  Treasury,  contributed  greatly  toward  relieving 
the  situation  and  the  restoration  of  confidence,  which,  after  all, 
is  more  essential  and  effective  in  bringing  about  a  return  to  nor- 
mal conditions  than  any  increase  in  the  circulating  medium. 

The  amount  of  Clearing  House  certificates  issued  by  the  New 
York  Clearing  House  Association  aggregated  $16,645,000;  by 
the  Boston  Clearing  House  Association,  $5,065,000,  and  by  the 
Philadelphia  Clearing  House  Association,  $8,870,000. 

While  the  severity  of  this  monetary  disturbance  passed  away 
to  a  considerable  extent  with  the  close  of  the  year  1890,  especially 
in  the  larger  cities,  its  effect  upon  the  country  at  large  continued 
throughout  the  following  year,  and,  as  Mr.  Lacey  said,  in  closing 
his  comments  upon  the  causes  which  led  to  the  disturbance,  the 
process  of  liquidation  continued  and  was  reflected  in  the  arrest  of 
a  multitude  of  contemplated  operations,  the  abandonment  of 
projects,  the  annulment  or  suspension  of  innumerable  contracts, 
the  curtailment  of  business  in  general  and  widespread  depression 
and  stagnation,  which  had  an  intimate  bearing  upon  the  bank  and 
business  failures  which  followed  in  1891. 

Although  Mr.  Lacey  accurately  described  the  conditions 
which  led  to  this  monetary  disturbance,  what  he  believed  to  be  the 
passing  away  of  the  financial  storm  was  simply  a  temporary  lull 
in  its  fury,  the  full  force  of  which  did  not  sweep  over  the  country 
until  1893,  a  little  more  than  a  year  after  he  had  retired  from 
the  office  of  Comptroller. 

National  Bank  Failures  During  Comptroller  Lacey's 
Administration 

During  the  three  years  and  one  month  of  Mr.  Lacey's  term 
as  Comptroller,  there  were  one  hundred  and  thirty-eight  failures 
of  national  banks.  Ninety-one  of  these  went  into  voluntary  liqui- 


ROMANCE  AND  TRAGEDY  OF  BANKING  155 

dation  after  closing  their  doors ;  forty-seven  were  placed  in  the 
hands  of  receivers,  and  one  of  the  latter  was  permitted  to  resume 
business,  having  been  restored  to  solvency. 

As  far  as  the  records  of  the  Comptroller's  office  show,  only 
one  bank  prior  to  1891  was  permitted  to  reopen  and  resume  busi- 
ness after  being  placed  in  the  hands  of  a  receiver. 

There  were  more  national  bank  failures  in  1891  than  during 
any  previous  year  in  the  history  of  the  national  banking  system. 
The  most  important  of  these  failures,  and  those  that  attracted 
the  greatest  attention,  were  the  Keystone  and  Spring  Garden 
National  Banks  of  Philadelphia,  and  the  Maverick  National  Bank 
of  Boston,  Mass.,  which  were  closed  March  20,  May  8  and  Octo- 
ber 31,  1891,  respectively,  and  were  placed  in  the  hands  of  re- 
ceivers, May  9,  May  21  and  November  2,  1891,  respectively. 

Between  the  dates  of  closing  of  these  institutions  and  the  ap- 
pointment of  receivers  these  banks  were  in  charge  of  national 
bank  examiners.  It  was  the  practice  of  the  Comptroller's  office 
at  that  time,  and  previously,  and  for  some  time  subsequent 
thereto,  when  a  bank  was  closed  to  place  an  examiner  in  charge 
of  its  affairs  to  ascertain  and  report  its  true  condition,  collect 
maturing  notes,  list  and  classify  its  assets  and  determine  its  lia- 
bilities. A  receiver  was  not  appointed  until  it  was  definitely  known 
that  there  was  no  possibility  of  the  bank  being  able  to  resume 
business.  Under  this  practice,  closed  banks  were  allowed  to  re- 
main in  charge  of  bank  examiners  for  weeks,  and  in  some  cases 
months,  before  a  receiver  was  appointed.  This  practice  contin- 
ued until  it  was  held  by  the  courts  that  Section  5240  of  the  Re- 
vised Statutes  of  the  United  States,  prohibiting  any  attachment, 
injunction  or  execution  against  a  national  bank  before  final  judg- 
ment, applied  only  to  insolvent  national  associations,  and  that 
insolvency  was  not  determined  until  a  receiver  was  appointed.  It 
was  held  that  while  property  of  the  failed  bank  in  the  hands  of  a 
receiver  was  not  attachable,  in  the  hands  of  a  bank  examiner  it 
was  attachable. 

This  position  was  subsequently  overruled  by  the  Supreme 
Court  of  the  United  States,  but  the  decision  of  the  lower  court 
led  to  a  discontinuance  of  the  administrative  policy  of  placing  a 
bank  examiner  in  charge  of  a  failed  association  for  an  indefinite 


156  ROMANCE  AND  TRAGEDY  OF  BANKING 

period,  and  the  adoption  of  the  practice  of  appointing  the  exam- 
iner receiver  temporarily  immediately  upon  the  closing  of  the 
bank,  in  order  to  avoid  any  question  in  regard  to  the  examiner's 
legal  status  or  the  status  of  the  failed  bank  in  his  hands. 

A  bank  examiner  in  charge  of  a  suspended  or  failed  national 
bank  is  charged  with  certain  important  responsibilities,  but  his 
powers  are  circumscribed  and  he  has  no  legal  status,  as  the  law 
makes  no  provision  for  such  a  contingency.  He  can  transact  no 
business,  nor  pay  out  any  money.  His  duty  is  to  collect  and  pro- 
tect maturing  paper,  keeping  the  proceeds  of  collections  separate 
from  the  cash  in  the  bank  at  the  date  of  suspension  or  failure.  He 
can  make  no  entries  on  the  bank's  books,  but  must  keep  the  assets 
intact  as  they  existed  at  the  date  of  suspension.  He  must  advise 
all  correspondent  banks  immediately  of  the  suspension  of  the 
association  and  to  withhold  the  payment  of  outstanding  drafts. 
His  principal  duty  is  to  list  and  classify  the  assets  coming  into 
his  hands  when  he  took  charge,  under  the  headings  of  good,  doubt- 
ful and  worthless,  and  thus  determine  as  accurately  as  possible 
the  resources  of  the  association.  In  brief,  he  must,  by  a  speedy, 
intelligent  and  thorough  examination  of  the  bank  bring  order  out 
of  the  chaotic  conditions  generally  found  to  exist  after  failure 
occurs  and  turn  over  to  the  receiver,  when  appointed,  a  complete 
and  detailed  list  of  the  assets,  and,  as  fully  as  possible,  the  liabili- 
ties of  the  association. 


Failure  of  the  Keystone  National  Bank 

The  Keystone  National  Bank  was  originally  a  State  institu- 
tion, doing  business  under  the  title  of  the  Keystone  Bank  of  Phil- 
adelphia. It  was  converted  into  a  national  association  July  30, 
1875,  with  C.  M.  Clingan,  president,  and  J.  E.  Wisnell,  cashier. 
The  board  of  directors  at  the  time  of  conversion  consisted  of 
C.  M.  Clingan,  Thomas  Lewis,  Thomas  Allman,  J.  C.  Lucas,  Wil- 
liam Armstrong,  H.  J.  Crump  and  Irwin  H.  Torrence.  J.  C. 
Lucas  was  made  president  of  the  bank  in  June,  1880,  and  contin- 
ued as  such  until  the  date  of  his  death. 

A  short  time  before  the  failure  of  the  institution  an  examina- 
tion disclosed  that  it  had  sustained  losses  sufficient  to  badlv 


ROMANCE  AND  TRAGEDY  OF  BANKING  157 

impair  its  capital.  An  assessment  of  the  stock  was  ordered  by 
the  Comptroller  to  make  good  the  impairment,  but  the  stock- 
holders were  unable  to  respond.  On  or  about  March  18,  1891, 
the  president  of  the  bank,  Gideon  W.  Marsh,  called  upon  the 
Comptroller  in  Washington  for  a  conference  in  regard  to  the 
condition  of  the  association.  As  a  result  of  the  disclosures  at 
this  conference,  the  Comptroller  instructed  the  bank  examiner  to 
close  and  take  possession  of  the  bank  the  following  morning, 
March  19,  1891.  Subsequent  investigation  revealed  the  most 
reckless  and  criminal  use  of  the  bank's  funds  by  the  president, 
aided  and  abetted  by  some  of  the  employees.  It  developed  that 
the  general  bookkeeper  had  aided  the  president  in  deceiving  the 
examiner  by  false  entries  made  at  or  about  the  time  the  bank  was 
due  for  examination.  After  his  conference  with  the  Comptroller 
in  Washington,  the  president  of  the  bank  absconded,  and  after 
suspension  the  bookkeeper  was  immediately  arrested. 

According  to  the  story  of  this  bookkeeper,  it  appears  that  he 
first  entered  the  bank  in  1880  as  a  general  utility  boy,  when  Lucas 
was  president.  Shortly  afterward  he  was  placed  in  charge  of  one 
of  the  ledgers,  in  addition  to  being  given  work  of  a  minor  char- 
acter. Later  he  was  made  general  bookkeeper,  and  in  January, 
1890,  he  was  appointed  assistant  cashier,  at  the  same  time  re- 
taining his  position  as  general  bookkeeper.  His  salary  was  ad- 
vanced gradually  until  it  reached  the  sum  of  two  thousand  dol- 
lars per  annum.  A  few  months  after  assuming  the  duties  of  book- 
keeper, he  stated,  he  was  instructed  by  President  Lucas  to  make 
a  false  entry  in  the  individual  ledger,  but  he  claimed  that  at  the 
time  he  did  so  he  did  not  know  that  there  was  anything  wrong  in 
the  act  or  in  the  direction  of  the  president  for  him  to  make  the 
entry.  This  entry,  he  stated,  was  for  the  purpose  of  covering  up 
an  overdraft  in  Mr.  Lucas's  account  of  about  $5000,  and  was 
made  a  day  or  two  prior  to  an  examination  of  the  bank  by  the 
national  bank  examiner,  and  after  the  examination  he  altered  the 
books  by  direction  of  the  president,  to  conform  to  the  facts.  He 
stated  that  he  did  not  know  whether  this  transaction  was  the  com- 
mencement of  the  irregularities  in  the  bank's  books  or  not,  but 
was  inclined  to  believe  that  the  president  had  carried  checks  in 
the  paying  teller's  cash  drawer  which  were  counted  as  cash  prior 


158  ROMANCE  AND  TRAGEDY  OF  BANKING 

to  this  time.  Mr.  Marsh  was  at  that  time  paying  teller  as  well 
as  cashier. 

He  was  unable  to  state  how  rapidly  the  overdraft  of  the  presi- 
dent increased,  but  he  was  under  the  impression  that  the  account 
never  was  made  good  from  that  time  to  the  date  of  closing  the 
bank,  but  that  it  grew  larger  and  larger  until  it  reached  the  sum 
of  $330,000.  This  overdraft,  he  stated,  was  never  allowed  to 
appear  on  the  ledger,  the  larger  figures  being  dropped  altogether. 
This,  of  course,  threw  the  ledger  out  of  balance,  and  in  order  to 
make  it  balance  at  the  time  of  the  bank  examiner's  examinations, 
a  sufficient  amount  was  deducted  from  the  various  accounts  in 
the  ledger  to  equalize  the  overdraft.  There  were  other  over- 
drafts, he  stated,  which  were  covered  in  the  same  way,  the  bulk  of 
which  were  in  the  accounts  of  the  president,  who  was  interested 
in  some  real  estate  investments  at  Spring  Lake  and  Sea  Girt, 
N.  J.,  with  Lucas  &  Brother,  William  Lucas  and  H.  H.  Yard. 

These  transactions,  he  said,  occurred  mainly  in  the  ledger  of 
which  he  had  charge,  but  when  the  overdrafts  became  so  large 
that  a  sufficient  amount  could  not  be  safely  taken  from  accounts 
in  one  ledger  to  make  up  the  deficiency,  recourse  was  had  to  other 
ledger  accounts.  In  this  manner  the  ledger  summaries  had  to  be 
altered  to  a  corresponding  amount.  In  other  words,  if  fifty  thou- 
sand dollars  of  credit  balances  were  taken  from  the  first  ledger 
the  amount  called  for  by  the  summary  of  that  ledger  had  to  be 
diminished  by  fifty  thousand  dollars,  and  if  these  balances  were 
placed  to  the  credit  of  the  president  in  the  second  ledger  the  sum- 
mary of  that  ledger  had  to  be  increased  by  that  amount. 

The  assistant  cashier  stated  that  these  irregularities  were  the 
only  kind  that  he  was  closely  identified  with,  or  rather  in  the  mak- 
ing of  which  he  was  the  prime  factor,  acting  under  the  directions 
of  the  president  of  the  bank.  He  stated  that  he  was  kept  at  this 
kind  of  work  even  after  he  was  placed  in  charge  of  the  general 
ledger,  making  the  alterations  usually  at  night  or  late  in  the 
afternoon.  He  stated  that  he  had  known  the  president  of  the 
bank  to  go  to  the  paying  teller's  drawer  and  take  out  a  handful 
of  notes,  count  them  and  say  to  the  teller :  "I  have  ten  thousand 
dollars,  for  which  I  will  give  you  a  check  in  a  few  minutes,"  but 
the  check  was  never  given.  A  memorandum  was  carried  in  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  159 

cash  by  the  teller  for  the  amount.  This,  he  said,  was  done  with 
the  receiving  teller's  cash,  but  the  receiving  teller  always  passed 
his  memorandum  over  to  the  paying  teller  in  his  daily  settlements. 

The  old  banking  house  of  the  association,  he  stated,  was  owned 
by  President  Lucas,  although  he  was  quite  sure  in  his  own  mind 
that  it  was  purchased  with  money  taken  directly  from  the  bank. 
The  new  banking  house  was  built  with  the  bank's  money.  He 
stated  that  he  had  known  the  president  to  buy  up  various  bank- 
rupt concerns  and  carry  on  the  business  himself,  placing  a  man- 
ager in  charge.  He  had  seen  the  vaults  and  cellars  of  the  old 
bank  stocked  with  imported  wines,  Bibles,  etc.,  and  cases  of  silver- 
ware purchased  from  the  bankrupt  concerns.  Whatever  money 
was  lost  in  these  concerns,  the  bank  had  to  bear.  Whatever  was 
received  from  the  sales  of  such  wares  was  generally  placed  to  the 
personal  credit  of  President  Lucas. 

The  discrepancy  of  $200,000,  which  was  found  to  exist  in  the 
bills  discounted  account,  he  stated,  was  caused  by  the  discount 
of  too  many  notes  from  time  to  time  for  the  various  accounts 
which  the  president  managed  in  connection  with  the  Sea  Girt  and 
Spring  Lake  properties,  which  notes  were  abstracted  and  de- 
stroyed and  marked  paid  on  the  books,  and  when  examinations 
were  expected,  fictitious  notes  were  substituted  and  carried 
through  the  books,  as  if  they  had  at  some  prior  time  been  dis- 
counted and  carried  through  in  the  ordinary  way. 

He  stated  that  H.  H.  Yard's  account  was  overdrawn  as  much 
as  $275,000  and  that  he  was  so  closely  identified  with  President 
Lucas  as  to  make  it  impossible  to  distinguish  between  them  in 
their  transactions  with  the  bank. 

The  greatest  trouble  that  the  bank  encountered  was  in  its  deal- 
ings with  the  Clearing  House.  The  bank  was  constantly  indebted 
to  this  association,  and  as  this  indebtedness  had  to  be  met  daily 
at  twelve  o'clock,  any  means  and  every  means  was  resorted  to  to 
raise  the  funds  required.  Every  place  where  the  bank  could  get 
credit,  it  would  borrow  for  periods  of  varying  length,  generally 
from  day  to  day.  In  the  hurry  and  stress  with  which  these  loans 
were  effected,  there  was  much  done  of  which  no  record  was  made. 
This  occasioned  no  end  of  trouble  in  settling  accounts  at  the  close 
of  the  day.  A  number  of  loans  were  made  to  the  bank  by  some  of 


160  ROMANCE  AND  TRAGEDY  OF  BANKING 

the  other  banks  for  comparatively  long  periods  which  were  re- 
newed from  time  to  time,  and  no  record  was  made  on  the  books  of 
the  bank  of  such  liabilities.  When  large  deposits  were  made,  espe- 
cially in  new  accounts,  or  when  certificates  of  deposit  were  issued, 
Cashier  Marsh,  it  was  alleged,  would  retain  the  deposit  ticket  in 
his  desk  and  rush  off  with  the  funds  to  pay  a  loan,  or  part  of  a 
loan  that  was  due  or  past  due,  and  the  deposit  ticket  was  not  seen 
again  for  several  days,  if  ever.  When  checks  were  received  against 
such  deposits,  or  when  the  certificates  were  presented  for  pay- 
ment, no  funds  were  to  the  credit  of  the  accounts  to  meet  them, 
and  in  order  to  straighten  out  such  accounts  false  entries  were 
resorted  to. 

On  various  occasions  the  Clearing  House  Committee  made  ob- 
jection to  the  bank's  line  of  discounts,  protesting  that  it  was  too 
large,  or  that  the  reserve  was  too  low,  or  that  the  foreign  reserve 
was  out  of  proportion  to  the  home  reserve.  When  such  objections 
were  raised,  arbitrary  changes  were  made  in  these  accounts,  in- 
creasing or  diminishing  the  balances  to  adjust  proportions.  So 
many  alterations  and  realterations  were  made  in  the  bank's  books 
that  it  was  difficult  in  many  cases  to  separate  the  false  from  the 
genuine  entries. 

J.  C.  Lucas,  the  president  of  the  bank,  who,  the  assistant 
cashier  claimed,  was  responsible  for  his  wrong-doing,  died  before 
the  bank  failed,  and  G.  W.  Marsh,  the  cashier,  was  made  presi- 
dent. Marsh  was  indicted  in  1891  for  wilfully  misapplying  the 
funds  of  the  association,  and  was  also  indicted  with  Charles  Law- 
rence, the  assistant  cashier,  for  making  false  entries  in  the  books 
of  the  bank.  Lawrence  was  also  indicted  separately  for  making 
false  entries.  After  the  failure  of  the  bank  Marsh  absconded  and 
was  a  fugitive  from  justice  for  several  years,  but  he  returned  in 
December,  1898,  pleaded  guilty  to  the  indictments  and  was  sen- 
tenced to  a  term  in  the  penitentiary.  Lawrence  pleaded  guilty 
in  1891  and  was  also  sentenced  to  the  penitentiary. 

The  total  book  value  of  the  assets  of  this  bank  at  the  time  of 
failure  was  $1,864,795.  The  losses  on  assets  compounded  or  sold 
by  the  receiver  under  order  of  the  court  were  $1,429,122.  The 
stockholders  were  assessed  one  hundred  per  cent.,  or  $500,000. 
Of  this  amount  $241,511  was  collected,  and  the  total  collections 


ROMANCE  AND  TRAGEDY  OF  BANKING  161 

from  all  sources  amounted  to  $580,396.  Eighteen  per  cent,  divi- 
dends were  paid  to  depositors  and  other  creditors,  or  $147,748, 
and  the  receivership  was  finally  closed  January  31,  1902. 

After  the  closing  of  this  association  and  before  its  affairs  were 
placed  in  the  hands  of  a  receiver,  efforts  were  made  by  some 
prominent  Philadelphians  and  stockholders  of  the  bank  to  raise 
sufficient  funds  by  voluntary  subscription  to  restore  the  bank  to 
solvency  and  resume  business  under  an  entirely  new  board  of 
directors  and  officers,  but  when  it  was  discovered  that  the  bank 
had  been  completely  looted  by  some  of  its  officers  all  efforts  to 
revive  it  were  abandoned  and  a  receiver  became  necessary  to  wind 
up  its  affairs. 

Failure  of  the  Spring  Garden  National  Bank 

The  failure  of  the  Spring  Garden  National  Bank  followed 
closely  upon  that  of  the  Keystone  National.  This  bank  was  also 
originally  a  State  institution,  doing  business  under  the  title  of 
The  Spring  Garden  Bank  of  Philadelphia.  It  was  converted  into 
a  national  association  March  13,  1886.  The  immediate  cause  of 
suspension  was  its  failure  to  meet  Clearing  House  balances. 

The  unsatisfactory  condition  of  this  bank  was  apparent  to 
the  Comptroller's  office  for  several  months  immediately  preceding 
its  suspension,  and  the  officers  of  the  bank  had  been  repeatedly 
admonished  by  the  Comptroller  to  make  good  and  maintain  the 
lawful  reserve  at  the  legal  requirement.  The  Clearing  House  was 
aware  of  the  bank's  inability  to  do  this  and  on  several  occasions 
complained  to  the  Comptroller  of  the  deficiency  in  reserve.  In 
October,  1890,  when  the  financial  stringency  came  on,  the  depos- 
itors in  this  institution  became  alarmed  at  the  embarrassment  of 
other  banks  and  began  withdrawing  their  deposits.  The  average 
monthly  withdrawals  for  several  months  before  suspension 
amounted  to  $100,000,  so  that  the  bank  was  unable  to  meet  its 
Clearing  House  balances. 

At  the  time  of  the  failure  of  this  institution,  F.  W.  Kennedy 
was  its  president,  and  H.  H.  Kennedy  the  cashier.  Subsequent 
investigation  disclosed  criminal  violations  of  law  on  the  part  of 
these  officers  and  two  of  the  directors  of  the  association,  no  less 


162  ROMANCE  AND  TRAGEDY  OF  BANKING 

culpable  than  those  of  the  officers  of  the  Keystone  National  Bank. 
Both  of  the  Kennedys  were  indicted  for  wilfully  misapplying  the 
funds  of  the  association  and  both  pleaded  guilty  and  were  sen- 
tenced to  terms  in  the  penitentiary.  Nelson  F.  Evans  and 
Ephraim  Young,  directors  of  the  bank,  were  also  indicted  for  the 
same  offense  and  entered  pleas  of  not  guilty*  but  were  also  con- 
victed and  sentenced  to  the  penitentiary. 

The  capital  of  this  bank  was  $750,000.  Its  total  assets  and 
liabilities  at  the  time  of  failure  amounted  to  $2,936,662,  respec- 
tively. The  loans  on  assets  compounded  or  sold  under  order  of 
the  court  amounted  to  $2,367,827.  One  hundred  per  cent,  assess- 
ment was  levied  upon  the  shareholders,  or  $750,000,  of  which 
amount  there  was  collected  $274,110,  and  the  total  amount  col- 
lected by  the  receiver  from  all  sources  aggregated  $712,711.  The 
creditors  were  paid  dividends  amounting  to  25.70  per  cent.,  or 
$537,687,  and  the  receivership  was  finally  closed  December  9, 
1901. 

The  difference  between  the  sum  collected  by  the  receiver  and 
the  amount  paid  the  creditors,  represents  loans  paid  and  expenses 
of  the  receivership. 

Failure  of  the  Maverick  National  Bank 

The  Maverick  National  Bank  of  Boston  was  originally  a  State 
institution.  At  the  time  of  its  conversion  into  a  national  associa- 
tion in  December,  1864,  its  capital  stock  was  $400,000,  and  its 
liabilities,  exclusive  of  capital,  $495,461.  The  last  report  of  con- 
dition of  the  National  Association  immediately  preceding  its  fail- 
ure showed  its  capital  to  be  $400,000,  surplus  $800,000,  and  its 
total  liabilities,  exclusive  of  capital,  $10,343,749. 

For  some  time  before  the  failure  of  the  institution  it  had  been 
in  an  unsatisfactory  condition  and  was  a  source  of  anxiety  to  the 
Comptroller's  office,  although  there  was  no  reason  to  believe  that 
it  was  insolvent.  This  unsatisfactory  condition  was  due  to  the 
largely  excessive  loans  made  to  certain  of  the  bank's  directors. 
The  real  character  and  extent  of  the  loans,  however,  were  not 
known  to  the  Comptroller  until  after  the  failure  of  the  bank,  when 
their  speculative  nature  was  revealed. 


ROMANCE  AND  TRAGEDY  OF  BANKING  163 

Asa  P.  Potter  was  president  of  the  institution  and  its  ruling 
spirit.  He  and  one  of  its  directors,  Jonas  H.  French,  owned 
more  than  half  of  the  capital  stock.  Potter's  holdings  amounted 
to  $147,000,  and  French's  to  $96,500.  They  appeared  to  operate 
the  bank  as  their  personal  institution,  without  regard  to  law  or 
the  restrictions  of  the  statutes,  and  freely  used  its  funds  in  reck- 
less speculations.  Numerous  loans  were  made  largely  in  excess 
of  the  legal  limit,  not  only  to  themselves,  but  to  others  with  whom 
they  were  connected  in  business  or  in  speculative  ventures.  To 
conceal  these  large  unlawful  loans,  deceptive  methods  were  re- 
sorted to.  Dummy  notes  were  freely  used,  collaterals  were  depos- 
ited with  the  notes,  and  written  guarantees,  separate  from  the 
notes,  were  taken  from  the  real  debtors.  The  signers  of  these 
notes  were  relatives,  street  brokers,  clerks,  messengers,  janitors, 
white  and  colored,  and  minors  under  the  age  of  fourteen  years. 

Among  the  concerns  that  were  excessive  borrowers  of  the  bank 
was  the  firm  of  Irving  A.  Evans  &  Company,  stock  brokers,  with 
which  Mr.  Potter  was  associated.  Irving  A.  Evans  failed  owing 
the  bank  $611,326,  and  shot  himself  at  Allentown,  N.  H.,  on  the 
16th  day  of  October,  1891.  Immediately  following  his  suicide, 
Potter  released  the  surviving  members  of  the  firm,  and  the  signers 
of  the  accommodation  notes  held  by  the  bank,  to  the  amount  of 
$591,326,  taking  collaterals  of  the  value  of  not  more  than 
$150,000  in  full  settlement.  The  greater  part  of  this  obligation 
was,  therefore,  thrown  upon  the  Maverick  National  Bank  in  the 
form  of  a  loan  on  a  note  signed  by  a  bookkeeper  in  the  bank  for 
$402,236,  with  the  Evans  collaterals  as  security. 

The  shock  of  the  Evans  failure  and  suicide  had  its  effect  upon 
the  bank  and  precipitated  its  closing  on  October  31,  1891,  on 
which  date  Alfred  Ewer,  who  was  the  assistant  of  the  National 
Bank  Examiner  for  Boston,  James  W.  Magruder,  took  posses- 
sion of  the  institution.  Mr.  Magruder,  whose  health  had  not  been 
good  for  some  time,  died  suddenly  on  the  day  following  the  closing 
of  the  bank. 

At  the  date  of  closing  Messrs.  Potter,  French  and  Dana  were 
indebted  to  the  institution  in  the  sum  of  $1,364,041.25,  $704,- 
182.93  and  $487,782.35  respectively,  or  a  total  of  $2,556,006.53. 


164  ROMANCE  AND  TRAGEDY  OF  BANKING 

After  the  failure  of  the  institution  an  examination  of  the 
books  disclosed  that  the  reports  of  condition  made  to  the  Comp- 
troller had  been  deliberately  and  systematically  falsified  in  order 
to  conceal  from  him  and  the  public  the  true  condition  of  the 
institution. 

Although  the  gross  liabilities  of  the  directors  amounted  to  the 
sum  of  $2,556,006.53,  the  reports  of  the  bank  showed  the  aggre- 
gate of  such  liabilities  to  be  less  than  $200,000.  The  limit  of  a 
loan  that  this  bank  could  lawfully  make  was  $40,000,  and  as  the 
board  consisted  of  only  five  directors,  if  each  director  had  bor- 
rowed to  the  limit,  the  aggregate  of  such  loans  could  not  have 
exceeded  $200,000.  Consequently,  the  sum  total  of  their  loans 
was  shown  in  the  sworn  reports  of  condition  of  the  bank  to  be 
less  than  $200,000. 

An  assessment  of  one  hundred  per  cent,  was  levied  by  the 
Comptroller  upon  the  stockholders  of  the  association,  and  $139,- 
427  of  this  amount  was  collected.  The  total  collections  from  all 
sources  amounted  to  $7,059,027,  and  90.16  per  cent.,  or  $6,754,- 
775,  was  paid  in  dividends  to  the  depositors  and  other  creditors. 
The  receivership  was  finally  closed  March  31,  1898. 

Voluminous  indictments  were  found  against  Asa  P.  Potter,  the 
president  of  the  bank,  and  Jonas  H.  French  and  Thomas  Dana, 
directors,  for  wilful  misapplication  of  the  funds  of  the  associa- 
tion, embezzlement,  false  entries  in  the  books  and  false  reports  to 
the  Comptroller,  but  these  indictments  were  quashed  by  Judge 
Nelson  of  the  United  States  Court.  Some  time  later  other  indict- 
ments were  found  against  these  same  individuals,  which  were  sus- 
tained and  the  cases  were  assigned  for  trial.  For  some  reason  or 
other  the  Government  appears  to  have  abandoned  all  of  the  in- 
dictments, excepting  that  against  Asa  P.  Potter,  for  over-certifi- 
cations of  checks.  He  was  tried  on  this  indictment  and  found 
guilty.  A  sentence  of  thirty  days  in  jail  and  a  fine  of  five  thou- 
sand dollars  was  imposed  by  Judge  Putnam.  Exceptions  were 
filed  by  his  counsel  and  after  a  delay  of  a  year  or  more  were  heard 
by  the  Circuit  Court  of  Appeals,  which  sustained  some  of  the  ex- 
ceptions and  ordered  a  new  trial.  The  sentence  from  which  appeal 
was  made,  however,  was  so  light,  and  the  expenses  of  a  new  trial 
so  heavy,  that  the  Government  did  not  feel  warranted  in  prose- 


ROMANCE  AND  TRAGEDY  OF  BANKING  165 

cuting  the  case  to  a  finish.     Jonas  H.  French  and  Thomas  Dana 
died  some  time  afterward,  and  Potter  left  Boston. 


Laws  Relative  to  National  Banks 

On  June  2,  1892,  a  committee  was  appointed  by  the  United 
States  Senate,  under  authority  of  a  resolution  adopted  by  that 
body,  to  inquire  whether  the  laws  relative  to  national  banks  and 
the  customary  proceedings  under  such  laws  in  connection  with 
failures  of  national  banking  associations,  furnished  sufficient  pro- 
tection to  the  depositors  and  stockholders  in  such  institutions. 
Senator  William  E.  Chandler  was  made  chairman  of  the 
committee. 

This  committee  made  an  exhaustive  investigation  into  the 
causes  which  led  to  the  failure  of  the  Maverick  National  Bank 
and  the  manner  in  which  the  law  was  administered  by  the  Comp- 
troller of  the  Currency.  The  investigation  also  covered  the  fail- 
ures of  the  Keystone  and  Spring  Garden  National  Banks  of 
Philadelphia. 

The  conclusion  reached  by  the  committee,  as  shown  by  the 
report,  was  that  the  results  of  the  operations  of  the  national 
banking  laws  during  a  period,  at  that  time,  of  nearly  thirty  years, 
indicated  to  the  minds  of  the  committee  that  the  system  as  a  whole 
had  worked  very  satisfactorily  and  had  resulted  in  as  few  failures 
and  losses  as  could  reasonably  be  expected  under  any  banking 
system  that  could  be  devised. 

There  had  been  many  failures,  however,  the  committee  stated, 
that  could  probably  have  been  avoided  if  the  system  had  been  as 
perfect  as  it  could  have  been  made. 

What  the  committee  intended  to  imply  by  this  comment  is  not 
clear.  But  there  was  a  disposition  on  the  part  of  the  committee 
to  reflect  upon  the  course  of  the  bank  examiners  who  examined 
these  banks  previous  to  their  failure.  And  there  was  considerable 
justification  for  this,  as  the  testimony  showed  undue  intimacy  and 
improper  relations  between  the  examiner  and  the  officers  of  the 
bank  in  one  case,  and  great  laxity  or  culpability  in  the  others. 

It  might  also  be  implied  by  the  comment  of  the  committee  that 
Congress  itself  was  derelict  in  the  performance  of  its  duty,  in  not 


166  ROMANCE  AND  TRAGEDY  OF  BANKING 

having  given  due  consideration  to  the  recommendations  of  the 
Comptroller  of  the  Currency,  from  time  to  time,  for  such  amend- 
ments to  the  banking  laws  as  would  in  the  judgment  and  experi- 
ence of  the  Comptrollers,  have  strengthened  some  of  the  weak 
features  in  the  statutes  which  were  largely  responsible  for  the 
conditions  known  to  have  existed  in  these  banks  before  their 
failure. 

Evidently  the  committee  was  of  the  opinion  that,  additional 
legislation  was  necessary  to  reach  abuses  of  the  nature  of  those 
disclosed  by  the  investigation  of  the  causes  which  led  to  the  failure 
of  these  banks,  as  a  bill  to  amend  the  laws  relating  to  national 
banks  was  introduced  in  the  Senate  by  Senator  Chandler  on  Feb- 
ruary 11,  1893,  and  referred  to  the  Select  Committee  on  Failed 
National  Banks,  which  committee  reported  it  favorably  five  days 
later. 

This  bill  provided  for  an  increase  in  the  limit  of  loans  of  the 
banks  from  ten  per  cent,  of  the  capital  stock  to  an  amount  equal 
to  ten  per  cent,  of  the  capital  and  surplus,  the  latter  to  be  deter- 
mined by  the  report  of  the  examiner  at  the  time  of  the  last  previ- 
ous examination  of  the  association.  In  case  of  any  violation  of 
this  statute  it  was  made  mandatory  on  the  part  of  the  Comp- 
troller to  bring  a  suit  to  forfeit  the  charter  of  the  offending 
association,  and  the  Comptroller  was  prohibited  from  discontinu- 
ing such  suit  without  authority  of  the  Secretary  of  the  Treasury. 

While  the  law  at  that  time  contained  a  provision  authorizing 
such  a  proceeding,  its  enforcement  always  had  been  held  to  be  dis- 
cretionary with  the  Comptroller,  and  the  failure  on  his  part  to 
institute  a  suit  of  this  character  against  banks  which  had  been 
known  to  persistently  disregard  the  limitations  of  law  in  making 
loans,  has  subjected  him  to  severe  criticism  in  the  past  by  Con- 
gress and  the  press  of  the  country  when  banks  have  failed  through 
losses  sustained  upon  loans  which  largely  exceeded  the  prescribed 
limit. 

This  bill  provided  further  that  no  loan  should  be  made  to  any 
officer,  director,  employee  or  stockholder  of  the  bank  in  excess  of 
one  thousand  dollars,  except  upon  the  authority,  previously 
granted  in  writing,  and  signed  by  the  president  or  vice-president 
of  the  bank  and  three-fourths  of  the  directors,  or  by  a  majority 


ROMANCE  AND  TRAGEDY  OF  BANKING  167 

vote  of  the  directors  at  a  meeting  of  the  board  duly  recorded  on 
the  minutes  of  such  board  meetings.  The  directors  were  also 
required  to  keep  a  liability  register,  in  which  all  loans  should  be 
recorded,  and  any  false  entry  in  such  liability  record,  or  any  in- 
tentional omission  therefrom,  should  subject  the  guilty  party  to 
a  fine  of  not  exceeding  five  thousand  dollars,  or  to  imprisonment 
for  a  term  of  not  exceeding  one  year,  or  both,  in  the  discretion 
of  the  court. 

This  bill  also  empowered  the  Comptroller  to  summon  to  Wash- 
ington any  officer  or  director  of  a  bank  who  persisted  in  violat- 
ing the  law  after  due  admonition,  to  show  cause  why  he  should 
not  be  removed  from  office,  and  authorized  the  Comptroller,  with 
the  approval  of  the  Secretary  of  the  Treasury,  after  a  hearing, 
to  remove  from  office  such  offending  officer  or  director. 

In  order  to  facilitate  the  collection  of  assessments  from  share- 
holders to  make  good  an  impairment  of  the  capital  stock  of  a 
bank,  the  Comptroller  was  authorized  to  file  with  the  Recorder  or 
Register  of  Deeds  in  the  county  or  district  in  which  the  stock- 
holder resided,  or  in  which  he  owned  real  estate,  a  certificate  recit- 
ing the  name  of  the  stockholder,  the  number  of  shares  owned  by 
him  and  the  amount  of  the  assessment  thereon,  which  certificate 
should  constitute  a  lien  upon  any  real  estate  owned  by  such  share- 
holder for  the  amount  of  the  assessment. 

There  were  other  provisions  in  this  bill,  but  the  foregoing 
covers  its  most  important  features.  Like  all  previous  attempts 
to  impose  additional  restrictions  by  legislative  enactment  upon 
the  banks,  or  to  confer  increased  supervisory  powers  upon  the 
Comptroller,  so  as  to  enable  him  to  more  effectively  enforce  an 
observance  of  the  statutes,  this  bill  failed  to  become  a  law  and 
the  exhaustive  inquiry  made  by  the  committee  came  to  naught. 

The  National  Bank  Act  requires  the  Comptroller  of  the  Cur- 
rency to  report  annually  direct  to  Congress,  and  to  recommend 
among  other  things : 

Any  amendments  of  the  law  relating  to  banking  by 
which  the  system  may  be  improved  and  the  security  of  the 
holders  of  its  notes  and  other  securities  may  be  increased. 


168  ROMANCE  AND  TRAGEDY  OF  BANKING 

No  noteholder  of  a  national  bank  ever  has  lost  a  dollar 
through  the  failure  of  the  association  issuing  the  notes  to  redeem 
its  circulation  at  its  face  value.  The  circulation  of  national 
banks  being  absolutely  secured  by  a  deposit  of  interest-bearing 
bonds  of  the  United  States  with  the  Treasury  Department,  Comp- 
trollers of  the  Currency  did  not  deem  it  necessary  to  make  any 
recommendations  to  Congress  for  the  better  security  of  note- 
holders of  national  banks. 

But  what  of  the  depositors  and  other  creditors,  the  safety  of 
\vhose  funds  depend  wholly  upon  the  good  judgment  and  honesty 
of  the  management  of  a  bank  and  the  sufficiency  of  the  security 
held  for  its  loans.  What  has  been  done  since  the  passage  of  the 
original  Bank  Act  to  increase  the  security  of  deposits,  either  by 
way  of  legislation  enacted  or  recommendations  submitted? 

While  numerous  recommendations  for  amendments  to  the  law 
were  submitted  to  Congress  from  time  to  time  by  the  various 
Comptrollers,  which  in  the  judgment  of  each  would  have  improved 
the  system  and  added  to  the  security  of  depositors,  very  few  of 
these  suggested  amendments  were  enacted  into  law  or  received 
the  serious  consideration  of  Congress. 

Of  the  numerous  amendments  of  the  original  Bank  Act 
adopted  since  1864,  not  one  of  such  amendments  can  be  said  to 
have  had  for  its  object  the  increase  of  the  security  of  depositors 
in  national  banks.  Whatever  additional  safeguards  were  adopted 
in  the  interest  of  the  depositor  were  in  the  nature  of  administra- 
tive regulations,  which  in  the  absence  of  statutory  authority  were 
not  always  capable  of  enforcement,  especially  in  cases  where  en- 
forcement was  most  needed. 

The  continued  indifference  of  Congress  before  the  passage  of 
the  Federal  Reserve  Act  to  the  recommendations  of  the  Comp- 
troller of  the  Currency  for  such  amendments  to  the  national  bank- 
ing laws  led  Mr.  Lacey  to  conclude  his  annual  report  for  the  year 
1890  with  the  following  pointed  comments : 

The  Comptroller  desires  to  emphasize  the  fact  that  the 
national  banking  system  has  arrived  at  a  point  in  its 
history  when  continued  neglect  on  the  part  of  Congress 
is  as  potent  for  evil  as  unfriendly  action.  Certain  bur- 


ROMANCE  AND  TRAGEDY  OF  BANKING  169 

dens  resting  upon  it  must  be  removed  without  unnecessary 
delay,  if  immediate  stagnation  and  ultimate  decay  are  to 
be  prevented.  It  should  receive  such  wise  and  just  treat- 
ment as  will  result  in  a  healthful  growth,  or  else  provision 
should  immediately  be  made  for  the  inauguration  of  some 
new  system,  more  completely  adapted,  if  possible,  to  the 
wants  of  the  people.  Banks  are  indispensible  to  the  suc- 
cessful conduct  of  the  various  business  enterprises  which 
form  a  prominent  feature  in  modern  civilization.  These 
agencies  must  keep  pace  with  the  progress  made  in  manu- 
factures, in  commerce,  and  in  all  forms  of  industrial  ac- 
tivities, or  serious  embarrassements  will  surely  follow.  The 
national  system  must  occupy  the  field  or  give  way  to  an- 
other. 

What  Mr.  Lacey  said  with  so  much  truth  and  force  had  no 
apparent  effect  on  the  legislative  branch  of  the  Government.  No 
material  amendment  was  made  to  the  laws  until  the  adoption  of 
the  Federal  Reserve  Act  in  December,  1913. 

The  inability  of  national  banks  in  the  meantime  to  handle 
certain  lines  of  business  within  their  corporate  powers  and  the 
limitations  of  law  led  to  the  formation  of  trust  company  adjuncts 
in  many  of  the  cities  and  towns  to  enable  the  banks  to  hold  a  class 
of  business  that  they  could  not  transact  as  national  associations, 
until  it  was  not  uncommon  to  see  a  national  bank,  a  savings  bank, 
and  a  trust  company,  operated  and  controlled  by  the  same  stock- 
holders and  the  same  management,  and  frequently  in  the  same 
building.  This  condition  became  a  necessity,  for,  as  Mr.  Lacey 
said,  "The  national  system  must  occupy  the  field  or  give  place  to 
another." 

Under  State  laws  commercial  banks  were  found  doing  a  com- 
mercial and  savings  bank  business,  savings  banks  doing  a  com- 
mercial business,  and  trust  companies  doing  all  three  classes  of 
business,  while  national  banks  were  restricted  in  their  operations 
to  purely  a  commercial  business. 

A  commercial  bank  with  a  separate  and  distinct  savings  and 
trust  department,  under  proper  restrictions,  can  be  as  safely  op- 
erated by  one  corporation  and  management  as  the  three  classes 
of  business  can  be  conducted  by  separate  corporations  operating 


170  ROMANCE  AND  TRAGEDY  OF  BANKING 

under  independent  charters  but  owned,  officered  and  controlled 
by  the  same  management  and  stockholders,  and  certainly  much 
more  economically,  and  therefore  more  profitably. 

Necessity  for  Some  Limitation  Upon  the  Discount  of  Commercial 

Paper 

The  conditions  disclosed  by  the  bank  failures  above  mentioned 
and  others  that  occurred  during  the  year  1891,  led  Mr.  Lacey  to 
express  the  opinion  in  his  report  for  that  year  that  some  limita- 
tion should  be  placed  upon  the  amount  of  commercial  or  business 
paper  that  may  be  discounted  by  a  national  bank  for  any  one 
person,  company,  corporation  or  firm,  and  that  a  similar  restric- 
tion should  be  placed  upon  indirect  liabilities  of  guarantors  or 
endorsers.  If,  he  stated,  it  was  deemed  necessary  to  limit  direct 
loans  to  a  percentage  of  the  capital  of  a  bank,  for  the  same  reason 
indirect  liabilities  should  be  subject  to  some  restriction. 

Further  comments  will  be  made  upon  this  subject  in  connec- 
tion with  the  recommendations  submitted  to  the  National  Mone- 
tary Commission  in  December,  1908,  for  amendments  to  the 
national  banking  laws. 

Suggested  Amendments  to  the  Law 

Most  of  the  recommendations  for  amendments  to  the  banking 
laws  urged  by  Mr.  Lacey  upon  Congress  were  in  relation  to  the 
note-issuing  function  of  the  banks.  Some  of  these  proposed 
amendments  have  been  since  enacted  into  law.  One  recommenda- 
tion, however,  which  seemed  to  have  considerable  merit,  did  not 
receive  favorable  action  by  Congress  until  the  passage  of  the 
Federal  Reserve  Act  in  1913,  although  Senator  John  Sherman, 
on  July  15,  1890,  reported  a  bill  favorably  from  the  Finance 
Committee  designed  to  carry  it  into  effect.  This  proposition  was 
to  reduce  the  minimum  amount  of  bonds  which  the  banks  were 
required  to  deposit  as  security  for  circulation  and  as  a  condition 
precedent  to  obtaining  a  charter,  to  one  thousand  dollars,  re- 
gardless of  the  amount  of  the  bank's  capital,  instead  of  a  deposit 
of  bonds  equal  to  one-fourth  of  the  capital  stock  by  banks  with 


ROMANCE  AND  TRAGEDY  OF  BANKING  171 

a  capital  of  less  than  $150,090,  and  a  deposit  of  fifty  thousand 
dollars  by  banks  with  a  capital  in  excess  of  $150,000,  as  required 
by  then  existing  law. 

This  legislation  was  recommended  by  Mr.  Lacey  in  order  to 
relieve  the  banks  from  the  enforced  necessity  of  issuing  unre- 
munerative  circulation  when  there  was  no  need  or  demand  for  an 
increase. 

The  Federal  Reserve  Act  dispensed  with  the  requirement  for 
the  deposit  of  any  charter  bonds. 

In  his  report  for  1889,  Mr.  Lacey  called  attention  to  a  per- 
plexing question  which  was  frequently  raised  while  he  was  Comp- 
troller, in  connection  with  the  existence  of  banks  with  a  small 
capital  in  places  contiguous  to  large  cities.  Where  the  growth 
of  large  cities  brought  these  smaller  banks  within  the  corporate 
limits  the  anomaly  was  frequently  presented  of  a  bank  with  a 
capital  stock  of  fifty  thousand  dollars  or  less  doing  business  in 
a  city  the  population  of  which  would  not  permit  of  the  organiza- 
tion of  a  bank  with  a  capital  of  less  than  two  hundred  thousand 
dollars,  the  smaller  banks  carrying  a  reserve  of  fifteen  per  cent, 
and  the  larger  ones  twenty-five  per  cent.  Two  banks  of  exactly 
the  same  title  were  also  in  some  instances  brought  together  in  the 
same  city,  causing  confusion  and  friction. 

In  order  to  make  clear  the  rights  and  duties  of  banks  thus 
located,  Mr.  Lacey  suggested  legislation  on  the  subject,  although 
he  did  not  indicate  its  character,  but  nothing  was  done.  This 
question  of  organizing  small  banks  in  the  suburbs  of  large  cities 
continued  to  perplex  the  Comptroller's  office  until  June  6,  1913, 
when  the  Attorney  General  of  the  United  States  rendered  an 
opinion  taking  the  position  that  no  national  bank  could  legally 
be  chartered  in  any  place  within  the  corporate  limits  of  any  city, 
with  an  authorized  capital  of  less  than  the  minimum  amount 
required  by  law  for  a  bank  in  the  city  proper.  Since  this  decision 
no  national  banks  have  been  authorized  with  a  small  capital  in 
suburbs  within  the  corporate  limits  of  large  cities. 

Considerable  friction  having  arisen  between  officers  of  national 
banks  and  State  taxing  officers  as  to  what  constitutes  "moneyed 
capital"  within  the  meaning  of  the  Bank  Act  subject  to  taxation 
under  State  authority,  to  meet  this  difficulty  Mr.  Lacey  suggested 


172          ROMANCE  AND  TRAGEDY  OF  BANKING 

an  amendment  to  the  law  defining  in  clear  and  unmistakable  terms 
the  intent  of  the  language  employed  in  the  statute  "other  mon- 
eyed capital  in  the  hands  of  individual  citizens,"  as,  he  stated,  it 
was  difficult  in  some  cases,  in  view  of  the  fine  distinction,  to  deter- 
mine when  moneyed  capital  may  be  said  to  have  been  merged  into 
personal  property  or  exempted  by  the  statutes  of  some  States 
from  taxation. 

Mr.  Lacey  also  pointed  out  a  number  of  other  ambiguous 
terms  and  phrases  in  the  statutes,  difficult  of  interpretation,  and 
suggested  legislation  to  make  their  meaning  clear  and  definite. 

In  connection  with  the  liabilities  of  the  active  officers  of  the 
banks  Mr.  Lacey  recommended  that  they  be  excluded  from  incur- 
ring liabilities  to  the  association  with  which  they  are  connected 
for  any  amount,  and  that  the  directors  of  the  bank  be  limited  in 
their  direct  and  indirect  liabilities  to  an  amount  not  exceeding 
twenty  per  cent,  of  the  paid-in  capital  of  the  association.  He 
was  of  the  opinion  that  the  publication  of  the  liabilities  of  officers 
and  directors  in  the  aggregate  would  afford  a  valuable  safeguard 
against  the  excessive  use  of  the  funds  of  the  association  by  those 
who  were  entrusted  with  them. 

There  was  only  one  amendment  to  the  banking  laws  passed 
during  Mr.  Lacey's  term  of  office,  and  that  was  the  Act  of 
July  14,  1890,  requiring  all  deposits  of  lawful  money  made  by 
the  banks  with  the  Treasurer  of  the  United  States  for  the  re- 
demption and  retirement  of  their  circulation  to  be  covered  into 
the  Treasury  as  a  miscellaneous  receipt,  instead  of  being  segre- 
gated as  was  required  before  the  passage  of  this  Act.  This  pro- 
vision of  law,  however,  does  not  apply  to  deposits  received  by  the 
Treasurer  for  the  five  per  cent,  redemption  fund. 


A.  BARTON  HEPBURN 
Comptroller  of  the  Currency,  1892-1893 


CHAPTER  X 

A.  Barton  Hepburn 

f  I  ^HE  eighth  Comptroller  of  the  Currency,  A.  Barton  Hep- 
burn, was  appointed  to  succeed  Mr.  Lacey,  August  2, 
-*•  1892.  He  was  born  at  Colton,  X.  Y.,  July  24,  1846. 
He  received  his  preparatory  education  at  St.  Lawrence  Acad- 
emy, Potsdam,  N.  Y.,  and  the  Falley  Seminary,  Fulton, 
N.  Y.  In  1867  he  entered  Middlebury  College,  Middlebury,  Vt., 
from  which  institution  he  received  the  degrees  of  A.B.  and  LL.D. 
After  leaving  college  he  was  engaged  as  Professor  of  Mathematics 
in  the  St.  Lawrence  Academy  and  Principal  of  the  Ogdensburg 
Educational  Institute.  He  was  later  admitted  to  the  bar  and 
commenced  the  practice  of  law  at  Colton,  N.  Y.  Shortly  after- 
ward he  was  appointed  School  Commissioner  of  the  Second  Dis- 
trict of  St.  Lawrence  County,  which  position  he  held  for  over 
three  years.  He  was  elected  to  the  New  York  State  Assembly 
and  took  his  seat  January  1,  1875.  He  represented  his  district 
in  the  Legislature  for  five  consecutive  terms,  during  which  period 
he  was  a  member  of  the  Committees  on  Railroads,  Insurance, 
Judiciary,  and  Ways  and  Means,  and  devoted  his  attention  to 
commercial  and  financial  interests,  insurance,  railroads  and 
canals. 

As  chairman  of  the  Committee  on  Insurance  he  was  instru- 
mental in  introducing  and  securing  the  passage  of  a  bill  making 
life  insurance  policies  non-forfeitable  after  the  payment  of  three 
annual  premiums,  and  requiring  the  insurance  companies,  upon 
application,  to  issue  paid-up  insurance  to  an  amount  which  the 
surrender  value  of  the  policy  would  purchase  at  regular  rates. 

In  1879  he  was  chairman  of  the  Special  Railroad  Investiga- 
tion Committee,  known  as  the  "Hepburn  Committee,"  created  at 
the  instance  of  the  Chamber  of  Commerce  of  New  York  City,  the 
Board  of  Trade  and  Transportation,  and  other  commercial 
bodies  of  the  State.  He  reported  a  number  of  important  meas- 


174  ROMANCE  AND  TRAGEDY  OF  BANKING 

ures  to  the  Legislature,  which  became  laws,  among  which  were 
the  Act  creating  the  Railroad  Commission;  an  Act  to  regulate 
the  use  of  proxies,  and  an  Act  defining  and  regulating  annual 
reports  and  requiring  a  continuous  balance  sheet. 

In  April,  1880,  he  was  appointed  by  Governor  Cornell,  Super- 
intendent of  the  Banking  Department  of  the  State  of  New  York, 
which  position  he  retained  over  three  years,  until  succeeded  by 
Willis  S.  Paine,  under  Governor  Grover  Cleveland's  administra- 
tion. Mr.  Hepburn's  administration  of  the  Banking  Department 
of  New  York  was  very  successful  and  satisfactory,  and  was  gen- 
erally commended  by  the  banks  and  the  public.  In  recognition 
of  his  exceptional  ability  as  Superintendent,  in  1883,  he  was 
appointed  receiver  of  the  Continental  Life  Insurance  Company  of 
New  York  City,  and  liquidated  the  affairs  of  that  company. 

In  June,  1889,  he  was  appointed,  by  Mr.  Lacey,  National 
Bank  Examiner  for  New  Yrork  City  and  Brooklyn,  to  succeed 
Valentine  P.  Snyder,  former  Deputy  Comptroller  of  the  Currency 
under  President  Cleveland.  He  demonstrated  his  ability  as  a 
financier  and  a  man  of  discretion  and  judgment  in  this  position, 
and  his  prompt  and  decisive  action  in  connection  with  the  Sixth 
and  Lenox  Hill  bank  frauds  secured  the  conviction  of  the  princi- 
pal wrongdoers  in  those  banks  and  a  restitution  of  the  funds  mis- 
appropriated. He  retained  the  position  of  examiner  until  ap- 
pointed Comptroller  of  the  Currency,  July  27,  1892,  by  President 
Harrison,  to  succeed  Mr.  Lacey. 

The  position  of  National  Bank  Examiner  for  New  York  City 
was  the  most  important  and  remunerative  office  within  the  patron- 
age of  the  Comptroller  of  the  Currency,  and  the  examiner 
assigned  to  that  city  is  supposed  to  be,  and  should  be,  one  of  the 
most  efficient  in  the  service.  Under  the  fee  system  of  compen- 
sating examiners,  the  fees  paid  for  examinations  in  New  York, 
like  those  in  other  Central  Reserve  Cities,  were  based  on  the  cap- 
ital of  the  banks  examined,  with  an  additional  allowance  of  two 
cents  on  each  one  thousand  dollars  of  the  average  gross  liabilities 
as  shown  by  the  five  reports  of  condition  of  the  banks  for  the  pre- 
ceding year.  The  fee  based  upon  capital  varied  with  the  size  of 
the  banks.  For  a  bank  with  a  capital  stock  of  not  exceeding 
$300,000,  the  fee  was  fifty  dollars.  With  a  capital  of  over 


ROMANCE  AND  TRAGEDY  OF  BANKING  175 

$300,000  and  not  exceeding  $500,000,  it  was  sixty  dollars.  For 
a  capital  of  .over  $500,000  and  not  exceeding  $750,000,  it  was 
eighty  dollars.  For  a  capital  of  over  $750,000  and  under  a  mil- 
lion dollars,  one  hundred  dollars.  For  a  capital  of  $1,000,000, 
one  hundred  and  twenty  dollars,  and  an  additional  allowance  was 
made  of  one  dollar  for  every  hundred  thousand  dollars  of  capital 
in  excess  of  one  million. 

The  gross  fees  for  one  examination  of  all  the  national  banks 
in  New  York  City,  Brooklyn  and  Jersey  City,  which  latter  city 
was  in  the  New  York  City  district,  amounted  to  about  $17,000, 
and  in  later  years  to  considerably  more.  While  this  may  seem 
very  large,  measured  by  the  average  Government  compensation, 
when  the  examiner's  expenses  were  deducted  the  net  fees  were 
considerably  less  than  those  received  by  public  accountants  and 
others  engaged  in  the  same  line  of  work. 

The  examiners  in  New  York  City  employed  several  assistants, 
some  of  whom  were  high  salaried  men.  They  had  to  maintain  an 
office  with  all  the  paraphernalia  pertaining  thereto,  all  of  which 
had  to  be  paid  for  out  of  their  gross  earnings.  The  duties  of  the 
position  were  very  onerous,  but  the  experience  was  invaluable. 

With  his  experience  as  a  legislator,  as  Superintendent  of  the 
Banking  Department  of  New  York  State,  and  as  a  National  Bank 
Examiner  for  New  York  City,  Mr.  Hepburn  came  to  the  office  of 
Comptroller  of  the  Currency  thoroughly  and  unusually  well 
equipped  for  an  intelligent  discharge  of  the  responsible  duties  of 
the  position.  Unfortunately,  however,  he  did  not  have  an  oppor- 
tunity to  demonstrate  his  special  qualifications  as  a  financier, 
owing  to  the  brief  period  of  his  incumbency  incident  to  a  change 
in  the  political  complexion  of  the  Federal  administration.  His 
term  of  office  was  the  shortest  of  any  Comptroller  who  had  occu- 
pied the  position,  covering  a  period  of  only  nine  months  and 
twenty-three  days.  Notwithstanding  this  fact  his  administration 
was  marked  by  the  same  characteristic  ability  and  forcefulness 
that  was  shown  in  every  public  position  he  had  held.  His  entire 
career  in  public  life  indicates  that  he  was  a  man  of  exceptional 
attainments  and  executive  force,  and  a  worthy  successor  of  the 
able  men  who  preceded  him  in  the  office  of  Comptroller,  a  success- 


176  ROMANCE  AND  TRAGEDY  OF  BANKING 

ful  administration  of  which  calls  for  qualifications  of  the  highest 
type  and  character,  broadmindedness  and  conservatism. 

Upon  his  retirement  as  Comptroller,  Mr.  Hepburn  was  ap- 
pointed president  of  the  Third  National  Bank  of  New  York  City 
and  continued  at  the  head  of  that  institution  until  it  was  merged 
with  the  National  City  Bank  of  New  York  in  1897.  He  was 
appointed  vice-president  of  the  consolidated  institution,  but 
shortly  afterward  resigned  to  accept  the  presidency  of  the  Chase 
National  Bank  of  New  York,  which  position  he  continued  to  hold 
until  January,  1911,  when  he  resigned  but  continued  to  be  con- 
nected with  the  bank  as  chairman  of  the  board  of  directors,  and 
later  as  chairman  of  the  Advisory  Committee. 

Mr.  Hepburn  was  recognized  throughout  the  United  States 
and  the  money  centers  of  the  world  as  a  leading  authority  on 
financial  and  economic  questions.  He  is  the  author  of  "The  His- 
tory of  Coinage  and  Currency,"  a  work  which  required  much 
labor  in  its  compilation,  "Contest  for  Sound  Money",  and  also  of 
"Artificial  Waterways  and  Commercial  Development".  He  was 
also  a  frequent  contributor  to  financial  magazines  and  periodicals 
on  various  economic  subjects  comprehending  a  wide  range  of 
literary  research. 

Nothing  of  any  special  moment  in  connection  with  banking 
and  currency  occurred  during  Mr.  Hepburn's  short  term  of  office, 
as  his  administration  covered  the  brief  period  only  between  the 
temporary  subsidence  of  the  monetary  stringency  of  1890  and 
the  memorable  panic  of  1893,  so  that  no  opportunity  was  afforded 
him  to  display  the  executive  force  that  he  possessed  or  to  put  into 
execution  any  administrative  reforms  in  connection  with  his 
supervision  of  the  banks.  If  he  had  had  the  opportunity  there  is 
no  doubt  that  he  would  have  inaugurated  some  practical  reforms 
in  the  management  of  the  banks  and  raised  the  standard  of  the 
examining  force  to  a  higher  level  than  that  which  prevailed  at 
that  time. 

Mr.  Hepburn  died  in  New  York  City  on  January  25,  1922, 
as  the  result  of  injuries  received  in  an  accident  several  days  before 
that  date.  He  was  crossing  Fifth  Avenue  and  was  struck  by  a 
passenger  motor  bus  sustaining  a  compound  fracture  of  the  hip. 


ROMANCE  AND  TRAGEDY  OF  BANKING  177 

National  Bank  Failures  During  Mr.  Hepburn's  Term 

Seventeen  national  banks  were  placed  in  the  hands  of  receivers 
during  the  year  covered  by  Mr.  Hepburn's  first  and  only  report 
to  Congress,  but  only  seven  of  these  failures  occurred  during  the 
nine  months  of  his  administration.  The  remainder  occurred  dur- 
ing the  closing  months  of  his  predecessor's  term. 

The  largest  of  these  failures  was  the  California  National 
Bank  of  San  Diego,  with  a  capital  of  $500,000  and  liabilities  of 
nearly  a  million.  This  failure  was  regarded  as  a  great  calamity 
to  the  local  community  and  considerable  effort  was  made  to  effect 
a  resumption  of  the  bank.  When  it  was  found,  however,  upon 
investigation,  that  the  entire  capital  and  surplus  of  the  associa- 
tion had  been  absorbed  by  losses,  the  efforts  to  resuscitate  the 
bank  proved  futile,  and  the  former  president  of  the  association 
committed  suicide. 

The  failure  of  this  bank  was  due  to  the  excessive  use  of  its 
funds  in  the  promotion  of  local  enterprises  of  a  public  character 
involving  large  sums  of  money.  The  local  boom  collapsed  before 
any  of  the  enterprises  became  paying  investments,  with  the  usual 
result  that  the  bank  suffered  losses  and  suspension  followed. 

Criminal  violations  of  law  entered  largely  into  all  of  these 
failures,  and  two  suicides  were  the  result.  False  entries,  misappro- 
priation of  funds,  embezzlements,  reckless  management,  forgery, 
loans  to  irresponsible  relatives  of  the  management,  their  friends 
and  employees  of  the  banks,  promotion  of  speculative  enterprises, 
in  which  some  of  the  officers  were  interested,  and,  in  fact,  the 
whole  category  of  causes  which  invariably  end  in  failures  and  dis- 
aster, were  responsible  in  bringing  about  the  disruption  of  all  of 
these  associations. 

Failure  of  the  National  Bank  of  Guthrie,  Oklahoma 

Included  in  these  failures  was  that  of  the  National  Bank  of 
Guthrie,  Oklahoma,  which  closed  its  doors  on  June  13,  1892.  It 
appears  that  the  capital  of  this  bank  having  become  impaired, 
the  Comptroller  ordered  the  deficiency  to  be  made  good  by  an 
assessment  of  the  stock,  or  the  placing  of  the  bank  in  voluntary 


178 

liquidation,  as  provided  by  law.  A  meeting  of  the  stockholders 
was  called  and  held,  and  a  majority  voted  to  pay  the  assessment. 
While  under  the  law  it  requires  a  vote  of  two-thirds  of  the  stock 
to  place  a  bank  in  voluntary  liquidation,  an  assessment  to  make 
good  an  impairment  of  capital  may  be  levied  by  a  majority  of 
the  stock  represented  at  the  meeting.  The  president  of  the  bank 
owned  nearly  six  hundred  shares  of  the  capital  stock,  half  of 
which  was  hypothecated  with  the  United  States  National  Bank 
of  New  York  City,  and  one  hundred  shares  each  with  two  national 
banks  in  Kansas  City,  Mo.  One  of  these  banks  had  loaned  an 
amount  equal  to  the  par  of  this  stock,  and  the  other  two  fifty 
per  cent,  of  the  par  value.  A  large  minority  of  the  stockholders, 
including  the  United  States  National  Bank,  being  dissatisfied 
with  the  management  of  the  institution  and  with  the  course  taken 
at  the  stockholders'  meeting,  brought  an  action  in  the  District 
Court  of  Logan  County,  Oklahoma,  for  the  appointment  of  a 
receiver  to  take  charge  of  the  assets  of  the  bank,  and  upon  this 
petition  a  receiver  was  appointed  by  the  Territorial  Court  in 
June,  1892. 

This  petition  alleged,  among  other  things,  that  the  president 
and  cashier  of  the  bank  had  stolen  and  misappropriated  large 
sums  of  money  of  the  association  and  were  trying  to  collect  an 
assessment  from  the  stockholders  so  that  they  could  personally 
use  fifteen  per  cent,  of  the  amount  collected.  It  was  alleged 
further  that  nearly  one  hundred  shares  of  the  stock  claimed  to 
be  owned  by  the  president  never  had  been  paid  for,  and  that  at 
the  stockholders'  meeting  the  president  voted  shares  unlawfully, 
thus  controlling  the  action  of  the  meeting  and  voting  down  a 
motion  to  place  the  bank  in  voluntary  liquidation,  whereupon  the 
Territorial  Court  appointed  as  receiver  a  man  who  had  been  the 
personal  attorney  of  the  president  of  the  bank. 

When  the  Comptroller  learned  of  the  movement  to  have  the 
bank  placed  in  the  hands  of  a  receiver  appointed  by  the  court, 
he  immediately  appointed  the  national  bank  examiner  for  that 
section  receiver  and  directed  him  to  take  charge  of  the  bank. 
When  the  examiner  arrived  at  the  bank  he  found  the  receiver 
appointed  by  the  court  in  possession.  He  demanded  in  the  name 
of  the  Comptroller  of  the  Currency  that  the  assets  and  records 


179 

of  the  bank  be  turned  over  to  him,  but  his  demand  was  refused 
on  the  ground  that  the  depositors  and  other  creditors  of  the  asso- 
ciation had  been  paid  in  full,  and  that,  therefore,  the  stockholders 
alone  were  interested  in  the  remaining  assets  and  the  court  had 
jurisdiction.  The  national  bank  examiner,  however,  insisted  upon 
his  right  to  take  possession  of  the  bank  and  prepared  to  enforce 
that  right  through  the  courts,  when  the  Court  receiver  locked  up 
the  books  and  papers  of  the  bank  in  the  vaults  and  left  for  the 
East. 

The  receiver  appointed  by  the  Comptroller  never  obtained 
possession  of  the  bank,  but  the  Comptroller  never  recognized  the 
jurisdiction  of  the  Territorial  Court  to  appoint  a  receiver  and 
declined  to  surrender  to  him  the  bonds  of  the  bank  on  deposit 
with  the  Treasurer  of  the  United  States  as  security  for  circula- 
tion. These  bonds  were  withdrawn  from  the  Treasury  by  the 
Comptroller  and  sold  to  the  highest  bidder,  as  provided  by  law, 
the  circulation  of  the  bank  was  retired  with  the  proceeds,  and 
the  excess  over  circulation  was  returned  to  the  stockholders  of 
the  bank  by  the  Comptroller  in  the  form  of  a  dividend  of  four 
and  a  fraction  per  cent.  In  July,  1902,  the  bank  was  unani- 
mously voted  into  voluntary  liquidation  by  its  stockholders. 

The  action  of  the  court  in  appointing  a  receiver  for  this  bank 
recalls  to  mind  a  similar  incident  which  occurred  in  December, 
1903. 

A  press  dispatch  published  in  Washington  newspapers  an- 
nounced that  an  application  had  been  made  to  a  State  Court  for 
the  appointment  of  a  receiver  for  the  Windham  County  National 
Bank  of  Danielson,  Conn.,  and  that  a  hearing  had  been  arranged 
for  the  evening  of  the  same  day.  The  Acting  Comptroller  who 
was  in  charge  of  the  office  at  that  time,  upon  reading  this  an- 
nouncement immediately  communicated  by  telephone  with  the 
national  bank  examiner  for  the  district  in  which  the  bank  was 
located,  instructing  him  to  proceed  on  the  first  train  to  Daniel- 
son,  and  if  a  receiver  had  been  appointed  by  the  State  Court  to 
take  and  hold  possession  of  the  bank  in  the  name  of  the  Comp- 
troller of  the  Currency.  The  examiner,  after  traveling  all  night, 
reached  Danielson  the  following  morning,  and  upon  learning  that 
the  court  had  appointed  a  receiver  the  previous  evening,  went 


180  ROMANCE  AND  TRAGEDY  OP  BANKING 

immediately  to  the  bank  and  took  possession.  The  Court  receiver 
arrived  in  town  the  evening  before,  but  did  not  go  to  the  bank 
until  the  following  morning.  When  he  reached  the  bank  he  found 
the  national  bank  examiner  in  possession,  who,  in  the  meantime, 
had  been  appointed  receiver  by  the  Acting  Comptroller.  The 
Court  receiver  demanded  possession  of  the  bank  by  virtue  of  his 
appointment,  but  the  bank  examiner  informed  him  that  he  was  in 
possession  by  authority  of  the  Comptroller  of  the  Currency  and 
declined  to  yield.  The  Court  receiver  informed  him  that  he 
would  report  the  situation  to  the  Court  for  instructions.  The 
differences  between  the  two  factions  in  the  bank,  which  was  the 
cause  of  the  association  being  placed  in  the  hands  of  a  receiver, 
were  shortly  afterward  adjusted  and  the  bank  was  permitted  to 
resume  business  on  January  15,  1904,  after  being  closed  about 
three  weeks,  which  disposed  of  the  question  of  jurisdiction  in  this 
case. 

These  two  cases  were  the  only  instances  in  which  the  State  or 
Federal  courts  had  interfered  with  the  Comptroller's  statutory 
prerogative  to  appoint  receivers  for  active  national  banks.  Peti- 
tions or  applications  had  been  made  to  the  courts  in  other  cases 
for  the  appointment  of  receivers  for  banks  in  which  there  had 
been  dissentions  between  directors  or  dissatisfaction  on  the  part 
of  stockholders  with  the  management,  but  whenever  the  Comp- 
troller of  the  Currency  insisted  upon  the  exercise  of  his  authority 
under  the  law,  the  courts  recognized  his  right,  but  at  the  same 
time  held  that  his  authority  to  appoint  a  receiver  was  not  ex- 
clusive, claiming  that  Courts  of  Equity  were  not  ousted  of  their 
jurisdiction  to  place  a  bank  in  the  hands  of  a  receiver  in  cases 
where,  according  to  the  rules  of  equity,  it  may  pursue  such  a 
course  with  regard  to  insolvent  corporations  generally. 

Annual  Report  of  Mr.  Hepburn 

The  one  annual  report  made  by  Mr.  Hepburn  to  Congress, 
covered  a  period  of  only  three  months  of  his  own  administration 
and  nine  months  of  that  of  his  predecessor.  In  this  report  he 
commented  upon  the  phenomenal  crop  production  of  the  United 
States  in  1891  and  the  important  part  it  played  in  alleviating 


181 

the  depressing  effects  of  the  severe  monetary  stringency  and 
resulting  failures  of  banks  and  business  concerns  during  the  two 
preceding  years. 

This  report  shows  that  the  value  of  the  merchandise  exported 
from  the  United  States  during  the  year  ended  July  1,  1892,  ex- 
ceeded one  billion  dollars,  the  partial  failure  of  the  cereal  crop 
in  Europe  having  created  an  unusual  demand  for  American  food 
products. 

A  remarkable  feature  to  which  Mr.  Hepburn  called  attention 
in  this  connection  was  the  fact  that  although  there  was  a  mer- 
chandise balance  in  favor  of  the  United  States  of  over 
$242,000,000,  which  under  ordinary  circumstances  would  have 
resulted  in  large  imports  of  gold,  the  gold  and  silver  exports  ex- 
ceeded imports  by  over  $86,000,000.  This,  he  stated,  was  due 
to  the  fact  that  the  short  crop  in  Europe  having  been  followed 
by  a  serious  financial  disturbance  it  became  necessary  for  Europe 
instead  of  paying  for  American  cereals  from  their  surplus  cash 
to  draw  upon  their  own  capital  invested  in  American  securities, 
which  were  returned  in  considerable  amounts.  Apprehension  of 
our  monetary  legislation  and  the  fear  that  this  country  was  drift- 
ing toward  a  silver  basis,  it  was  said,  created  distrust  of  our 
securities  abroad,  and  had  an  important  influence  on  gold  expor- 
tations. 

The  monetary  stringency  of  1890-91,  Mr.  Hepburn  thought, 
was  wholesome  in  its  effect  so  far  as  putting  a  check  upon  specu- 
lation, and  while  conditions  generally  in  1892  were  favorable  for 
a  year  of  average  prosperity,  caution  and  conservatism  charac- 
terized the  business  transactions  of  the  year. 

In  this  report  Mr.  Hepburn  dwelt  at  length  upon  the  opera- 
tions of  the  Silver  Coinage  Act  of  February  28,  1878,  and  its 
repeal  by  the  Act  of  July  14,  1890.  He  also  discussed  the  pro- 
posed repeal  of  the  Act  of  March  3,  1865,  imposing  a  tax  of  ten 
per  cent,  on  State  bank  circulation,  and  drew  a  comparison 
between  the  old  State  bank  note  issues  and  the  circulation  of 
national  banks.  To  compare  one  with  the  other,  he  said,  was  like 
comparing  order  with  confusion,  and  a  perfect  system  under 
central  control  with  an  imperfect  system  under  diversified  control. 
The  most  notable  feature  of  '-tate  bank  circulation,  he  said,  was 


182  ROMANCE  AND  TRAGEDY  OF  BANKING 

the  violent  expansion  and  contraction  to  which  it  was  subjected, 
and  its  loss  of  money  power  in  a  crisis.  It  was  a  source  of  weak- 
ness which  added  to  the  danger.  Instead  of  paying  debts,  it  came 
forward  itself  to  be  paid.  The  return  to  such  a  system,  he  said, 
would  produce  disaster  to  those  who  most  need  and  have  the  best 
right  to  governmental  protection  in  guaranteeing  to  them  a  safe 
and  sound  currency. 

In  closing  his  report  to  Congress  Mr.  Hepburn  devoted  a 
chapter  to  the  subject  of  the  duties  of  directors  of  banks.  His 
views  on  this  subject  were  those  of  a  practical  man  and  were  quite 
in  contrast  with  the  impractical  ideas  of  one  of  his  successors  in 
office,  as  indicated  by  a  list  of  questions  which  the  latter  in- 
structed the  bank  examiners  to  ask  directors  at  the  time  of  exam- 
ination of  their  banks. 

"Directors,"  Mr.  Hepburn  stated,  "give  direction  and  control 
to  the  business  of  a  bank,  accept  and  reject  credits,  and  should 
understand  its  general  condition.  The  detailed  workings  of  a 
bank  must  be  trusted  to  the  officers  and  employees.  We  cannot 
have  anything  better  than  men.  Men  make  our  laws  and  men 
enforce  them.  Men  manage  our  banks.  No  matter  how  elaborate 
the  system,  how  numerous  the  checks  upon  error  or  upon  wrong- 
doing, or  however  perfect  the  machinery,  the  mechanism  must  be 
set  in  motion  and  the  system  operated  by  men.  There  is,"  he 
said,  "in  every  system  a  point  where  good  or,  ill  results  depend 
upon  the  character  of  the  man  in  charge.  If  an  engineer  wants 
to  ditch  his  train,  he  can  do  so.  If  the  president  or  cashier  of  a 
bank  wants  to  rob  it,  he  can.  Well  devised  systems  may  make  it 
difficult.  Efficient  supervision  may  make  it  dangerous.  The  law 
may  punish,  and  the  certainty  of  detection  and  punishment  may 
reduce  the  risk  to  a  minimum.  Hence  the  chief  and  most  impor- 
tant duty  of  directors  is  to  select  officers  of  character  as  well  as 
of  experience  and  ability.  They  can  best  protect  themselves  and 
best  serve  the  public  by  so  doing." 

In  concluding  his  comments  on  the  duties  of  directors,  Mr. 
Hepburn  suggested  that  the  management  of  banks  could  be  sub- 
stantially reached  and  corrected  if  the  Comptroller,  with  the 
approval  of  the  Secretary  of  the  Treasury,  were  given  power, 
after  a  hearing,  to  remove  bank  officers  and  directors  for  viola- 


ROMANCE  AND  TRAGEDY  OF  BANKING  183 

tions  of  law,  leaving  the  vacancies  to  be  filled  in  the  regular  way. 
Such  a  power,  he  thought,  would  be  seldom  exercised,  but  its  ex- 
istence would  deter  many  bank  officers  who  now  observe  the  letter, 
only  to  violate  the  spirit  of  the  law.  The  existence  of  this  author- 
ity would  also,  he  believed,  have  the  effect  of  commanding  more 
respect  on  the  part  of  officers  and  directors  of  banks  for  the  re- 
quirements and  directions  of  the  Comptroller  in  connection  with 
the  prompt  correction  of  bad  practices  and  unsatisfactory  con- 
ditions called  to  their  attention  through  the  reports  of  bank 
examiners. 

Amendments  Recommended 

Among  the  amendments  to  the  national  banking  laws  recom- 
mended by  Mr.  Hepburn,  which  have  not  since  been  adopted,  are 
the  following: 

1.  That  the  tax  on  national  bank  circulation  be  repealed  and 
that  the  banks  be  assessed  only  for  an  amount  sufficient  to  defray 
the  actual  cost  to  the  Government  of  providing  circulation. 

2.  That  the  Comptroller  of  the  Currency,  with  the  approval 
of  the  Secretary  of  the  Treasury,  be  empowered  to  remove  officers 
and  directors  of  a  bank  for  violations  of  law  after  due  hearing. 

3.  That  the  officers  and  employees  of  a  bank  be  prohibited 
from  borrowing  its  funds  in  any  manner,  except  upon  application 
to  and  approval  of  the  board  of  directors. 

4.  In  order  to  facilitate  the  collection  of  assessments  upon 
shareholders  in  failed  banks,  that  the  receivers  of  such  banks  be 
authorized   to   file  with  the   County   Clerk   or  Register  of  each 
county  in  which  any  stockholder  may  reside  a  statement  showing 
the  names  of  shareholders  residing  in  such  county  and  the  amount 
of  stock  held  by  them  respectively;  the  filing  of  such  statement 
to  constitute  a  lien  upon  the  realty  of  such  stockholders,  which 
lien  could  be  vacated  by  giving  proper  bond,  or  be  discharged 
by  the  receiver  upon  payment  of  the  assessment. 

5.  That    Section   380,   United    States    Revised    Statutes,    be 
amended  to  permit  attorneys  other  than  United  States  Attorneys 
to  be  employed  by  receivers  of  failed  banks,  whenever,  in  the  opin- 
ion of  the  Comptroller,  such  employment  would  be  for  the  best 
interest  of  a  trust. 


184  ROMANCE  AND  TRAGEDY  OF  BANKING 

This  last  amendment  was  recommended  because  of  the  insist- 
ence of  some  United  States  Attorneys  upon  the  recognition  by 
the  Comptroller  of  their  statutory  right  to  represent  receivers 
of  national  banks  in  all  litigation  for  collecting  debts  due  failed 
banks  and  to  receive  the  emoluments  therefrom. 

Mr.  Hepburn  explained  the  disadvantages  attending  the  em- 
ployment of  United  States  Attorneys  in  such  matters  and  the 
greater  expense  and  delay  involved,  as  compared  with  the  advan- 
tages in  every  respect  of  the  receiver  employing  an  attorney  of  his 
own  selection. 

While  the  Section  of  the  Revised  Statutes  referred  to  has  not 
been  amended,  United  States  Attorneys  have  not  insisted  upon 
their  right  to  represent  receivers  of  failed  national  banks  since 
the  decision  of  the  Supreme  Court  of  the  United  States  in  the 
case  of  Gibson  v.  Peters,  150  U.  S.,  342,  to  the  effect  that  the 
expenses  of  a  receivership  cannot  be  held  to  include  compensation 
of  a  district  attorney  for  conducting  a  suit  in  which  the  receiver 
is  a  party,  and  he  cannot  receive  any  compensation  for  services 
rendered  or  offered  to  be  rendered  a  receiver. 

In  support  of  his  first  recommendation,  Mr.  Hepburn  ad- 
vanced the  argument  that  national  banks  were  no  longer  organ- 
ized for  the  purpose  of  issuing  circulation.  If  the  system  is  to 
be  perfected  and  perpetuated,  he  stated,  it  was  incumbent  upon 
Congress  to  recognize  the  fact  that  it  must  be  made  less  burden- 
some and  more  profitable  to  the  banks,  not  only  by  a  reduction 
of  taxation,  but  by  an  enlargement  of  the  scope  of  their  corporate 
powers,  to  enable  them  to  meet  to  a  greater  degree  the  competi- 
tion of  other  banking  institutions  operating  under  State  author- 
ity. State  banks  and  trust  companies  had  for  years  gradually 
but  steadily  encroached  upon  the  business  of  national  banks,  until 
they  had  absorbed  such  a  large  proportion  of  the  banking  busi- 
ness of  their  respective  communities  as  to  make  it  very  difficult, 
if  not  impossible,  in  some  sections,  for  national  associations  to 
compete  with  them  within  the  limitations  of  their  corporate 
powers  and  statutory  restrictions. 

Mr.  Hepburn's  recommendation  for  a  repeal  of  the  tax  on 
circulation  is  one  which  Congress  should  adopt.  The  banks 


ROMANCE  AND  TRAGEDY  OF  BANKING  185 

should  be  assessed  only  for  an  amount  sufficient  to  reimburse  the 
Government  for  the  actual  cost  of  providing  circulation. 

The  total  expenses  of  the  Government  for  maintenance  of  the 
Currency  Bureau  from  the  date  of  its  organization  in  May,  1863, 
to  June  30,  1921,  exclusive  of  contingent  expenses,  amounted  to 
$20,965,816.00.  Since  1863  the  banks  have  paid  into  the  Treasury 
of  the  United  States  over  $155,188,318.73  in  taxes  upon  circula- 
tion, an  amount  considerably  more  than  ample  to  pay  the  entire 
cost  of  operating  the  Bureau  during  its  existence,  including  the 
cost  of  examinations  by  national  bank  examiners.  During  the  same 
period  the  banks  have  lost  millions  of  dollars  by  depreciation  in 
the  market  value  of  Government  bonds. 

Mr.  Hepburn  made  other  recommendations  for  amendments 
to  the  banking  laws,  some  of  which  have  been  adopted,  in  whole 
or  in  part,  and  others  have  been  partly  effected  by  administrative 
regulations. 

The  most  important  of  his  recommendations  in  its  bearing 
upon  the  business  of  the  banks  and  its  effect  upon  the  security  of 
creditors,  was,  perhaps,  his  proposed  amendment  of  Section  5200 
of  the  Revised  Statutes  fixing  the  limit  of  loans. 

Since  the  report  containing  his  views  on  this  subject  was 
published,  the  law  was  amended  increasing  the  limit  of  a  loan  that 
might  be  made  to  any  person,  company,  corporation  or  firm,  to 
an  amount  equal  to  ten  per  centum  of  the  unimpaired  capital  and 
surplus  of  the  bank,  but  not  exceeding  thirty  per  centum  of  the 
capital.  A  bank  with  a  surplus  equal  to  twice  the  amount  of  its 
capital,  under  this  law,  could  make  a  loan  equal  to  thirty  per  cent, 
of  its  capital,  but  a  bank  with  surplus  in  excess  of  twice  its  capi- 
tal was  restricted  to  the  thirty  per  cent,  limit,  no  matter  what 
its  surplus  might  be.  There  are  not  many  banks  that  have  a 
surplus  fund  greater  than  double  the  amount  of  their  capital. 

The  amendment  limiting  loans  to  thirty  per  cent,  of  capital 
was  repealed  by  later  legislation  authorizing  loans  to  be  made  to 
an  amount  equal  to  ten  per  centum  of  the  unimpaired  capital  and 
surplus  and  in  addition  thereto  the  discount  of  notes  under  cer- 
tain conditions  and  restrictions. 

The  purpose  of  our  legislators  in  fixing  a  limitation  upon 
surplus  was  to  discourage  the  formation  of  banks  with  a  small 


186          ROMANCE  AND  TRAGEDY  OF  BANKING 

capital  and  a  large  surplus,  with  a  correspondingly  limited  stock 
liability.  Formerly  banks  supplied  the  wants  of  their  customers 
from  capital  furnished  by  their  stockholders,  and  made  their 
profits  through  loaning  or  investing  their  own  funds.  Now  the 
tendency  seems  to  be  to  contribute  as  small  an  amount  of  capital 
as  is  necessary  to  command  public  confidence,  or  is  permissible 
under  the  Jaw,  and  to  do  business  upon  the  funds  furnished  by 
depositors.  This  makes  it  all  the  more  necessary  that  the  inter- 
ests of  the  creditors  of  the  banks  should  be  protected  as  fully  as 
possible  by  well-defined  restrictions  in  regard  to  loans  and 
investments. 

The  only  amendment  to  the  banking  laws  enacted  during  Mr. 
Hepburn's  administration,  notwithstanding  the  number  that  were 
recommended,  was  the  Act  of  August  3,  1892,  amending  the  Act 
of  June  30,  1876,  in  regard  to  the  appointment  of  an  agent  by 
the  stockholders  of  an  insolvent  association  to  liquidate  the  re- 
maining assets  after  the  depositors  and  other  creditors  of  the 
bank  had  been  paid  in  full  by  the  receiver.  This  amendment 
simply  authorized  the  stockholders  to  elect  whether  they  should 
appoint  an  agent  to  wind  up  the  bank  in  their  interests  or  allow 
the  receiver  to  do  so. 


JAMES  H.  ECKELS 
Comptroller  of  the  Currency,  1893-1897 


CHAPTER  XI 

James  H.  Eckels 

JAMES  H.  ECKELS,  the  ninth  Comptroller  of  the  Currency, 
was  appointed  April  26,  1893,  and  served  until  December  31, 
1897,  a  period  of  four  years  and  eight  months. 

Mr.  Eckels  was  born  in  Princeton,  111.,  November  22,  1858, 
and  was  thirty-five  years  of  age  when  appointed  Comptroller, 
although  in  appearance  he  did  not  look  to  be  more  than  twenty- 
five.  Smooth  face,  light  complexion,  small  of  stature  and  deli- 
cate, he  had  the  appearance  of  a  youth.  He  attended  the  public 
schools  of  his  native  city  and  graduated  at  the  High  School  at 
Princeton,  111.,  in  1876.  He  attended  law  school  at  Albany,  N. 
Y.,  and  graduated  in  1880.  While  in  Albany  he  made  the  ac- 
quaintance of  Grover  Cleveland,  who  was  then  Governor  of  New 
York,  and  Daniel  Lamont,  who  was  then  Governor  Cleveland's 
secretary.  This  acquaintanceship  laid  the  foundation  for  the 
prominence  which  Mr.  Eckels  attained  in  later  years  in  the  finan- 
cial world. 

In  1881  he  commenced  the  practice  of  law  at  Ottawa,  111., 
and  continued  in  pratice  until  his  appointment  as  Comptroller 
of  the  Currency  by  President  Cleveland  in  1893.  During  the 
Presidential  campaign  of  1892,  he  took  an  active  part  in  support 
of  his  friend,  the  Democratic  nominee,  and  made  a  number  of 
speeches,  principally  on  the  tariff  question. 

Previous  to  his  appointment  as  Comptroller,  Mr.  Eckels  was 
entirely  without  banking  experience.  He  was  an  applicant  for 
appointment  as  United  States  Attorney  for  the  district  in  Illinois 
in  which  he  resided,  and  no  one  was  surprised  more  than  he  when 
President  Cleveland  nominated  him  for  the  position  of  Comptrol- 
ler of  the  Currency.  At  first  it  was  reported  that  the  President 
had  made  a  mistake  in  sending  his  nomination  to  the  Senate  for 
Comptroller  instead  of  for  the  position  of  United  States  Attor- 
ney, but  when  President  Cleveland's  attention  was  called  to  the 
matter  he  declared  that  no  mistake  had  been  made.  He  expressed 

187 


188          ROMANCE  AND  TRAGEDY  OF  BANKING 

great  confidence  in  Mr.  Eckels'  ability,  and  desired  to  give  him  a 
better  position  than  that  of  United  States  Attorney.  Mr.  Eckels 
happened  to  be  at  the  Capitol  at  the  time  his  nomination  was 
received  at  the  Senate,  and  stated  to  some  of  the  newspaper  cor- 
respondents, when  they  told  him  of  the  nomination,  that  that  was 
the  first  information  he  had  of  the  President's  purpose.  When 
asked  what  experience  he  had  had  in  banking  to  qualify  him  for 
the  place,  he  candidly  replied  that  he  had  had  none  whatever, 
except  as  a  borrower. 

Up  to  this  time  it  had  been  the  invariable  rule  to  appoint  no 
one  to  the  office  of  Comptroller  of  the  Currency  who  had  not  had 
a  banking  experience,  and  there  was  considerable  doubt  at  the 
time  whether  the  Senate  would  break  away  from  this  practice  and 
confirm  the  nomination.  Ex-Comptroller  Lacey  happened  to  be 
in  Washington  when  the  nomination  of  Mr.  Eckels  was  made, 
and  knowing  Mr.  Eckels  personally  and  having  a  high  regard 
for  his  ability,  was  largely  instrumental  in  overcoming  the  objec- 
tions to  his  confirmation,  and  dispelling  the  impression  that 
seemed  to  prevail  that  only  a  practical  banker  of  long  experience 
was  qualified  to  satisfactorily  fill  the  office  of  Comptroller.  In  a 
published  newspaper  interview  at  that  time,  Mr.  Lacey  expressed 
the  opinion  that  the  position  was  one  that  called  for  a  man  of 
good  business  judgment  and  discretion  more  than  of  banking 
experience  or  legal  training,  and  while  a  banking  experience  would 
be  very  helpful  it  was  not  essential  to  a  successful  administration 
of  the  Bureau.  The  duties  of  the  Comptroller  of  the  Currency, 
he  stated,  were  well  defined  by  statute,  and  a  succsesful  adminis- 
tration of  the  office  required  only  the  exercise  of  good  business 
judgment,  discretion  and  conservatism. 

Mr.  Eckels  always  gratefully  remembered  the  services  ren- 
dered him  by  Mr.  Lacey  on  this  occasion,  and  while  the  nomina- 
tion would  no  doubt  ultimately  have  been  confirmed  by  the  Senate, 
he  believed  that  his  confirmation  was  very  materially  accelerated 
by  Mr.  Lacey 's  timely  assistance,  and  the  latter's  judgment  as 
to  the  qualifications  necessary  to  insure  a  successful  administra- 
tion of  the  office  was  fully  verified  by  Mr.  Eckels'  appointment. 

Shortly  following  his  appointment,  Mr.  Eckels  was  the  recipi- 
ent of  a  dinner  given  in  his  honor  by  some  of  his  fellow-townsmen 


KOMANCE  AND  TRAGEDY  OF  BANKING  189 

of  Ottawa,  111.  In  a  speech  delivered  on  that  occasion,  he  availed 
himself  of  the  opportunity  afforded  him  to  reply  to  some  of  the 
criticisms  that  had  been  made  of  his  selection  as  a  practicing 
attorney,  of  limited  experience,  to  preside  over  the  affairs  of  a 
Bureau  distinctively  financial,  and  said: 

No  impairment  of  any  system  can  be  brought  about  by 
an  honest  and  rigid  enforcement  of  the  laws  which  govern 
it,  and  those  most  strenuous  in  their  criticisms  must  not 
complain  if  the  National  Bank  Act  as  it  stands  on  the 
statute  book,  be  the  rule  and  guide  of  the  Comptroller. 

The  danger  has  always  been  the  indifference  of  bank 
officials  to  keeping  within  the  restrictions  of  law  and  not 
of  the  Comptroller's  exceeding  his  authority. 

He  declared  that  it  would  be  his  purpose  to  strive  always 
to  see  that  the  law  was  observed,  that  business  and  moral 
integrity  should  characterize  those  who  were  connected  with 
the  Comptroller's  bureau,  and  that  in  no  instance  should  the 
public  interests  be  sacrificed  to  political  expediency. 

Thus  did  Mr.  Eckels  in  brief  outline  his  policy  and  express 
his  conception  of  his  duties  and  responsibilities,  and  who  can  say 
that  a  practical  banker  would  have  discharged  the  duties  of  the 
position  with  more  credit  to  himself,  the  administration  which  he 
represented,  and  the  interests  of  the  public  at  large  during  the 
exceptional  period  of  Mr.  Eckels'  incumbency,  than  this  unknown 
lawyer  from  Ottawa. 

Considering  his  utter  lack  of  experience  in  banking  at  the 
time  he  assumed  charge  of  the  Currency  Bureau,  and  the  extra- 
ordinary conditions  which  immediately  followed  his  induction  into 
office,  his  administration  of  the  Bureau  and  the  soundness  of  his 
views  as  expressed  in  his  annual  reports  to  Congress  and  in  his 
public  addresses  and  writings  will  compare  favorably  with  those 
of  any  of  the  experienced  and  practical  bankers  who  preceded  or 
followed  him.  It  was  recognition  of  his  natural  ability  that 
led  Secretary  Lyman  J.  Gage  to  remark  that  "there  was  not  much 
to  Eckels,"  referring  to  hi.s  stature,  "but  what  little  there  was 
was  three-quarters  brains." 


190  ROMANCE  AND  TRAGEDY  OF  BANKING 

Mr.  Eckels  resigned  the  office  of  Comptroller  on  December  31, 
1897,  near  the  end  of  his  five-year  term,  to  accept  the  presidency 
of  the  Commercial  National  Bank  of  Chicago,  which  position  he 
retained  until  the  date  of  his  death.  He  died  suddenly  in  Chi- 
cago, of  heart  disease,  in  April,  1907. 

Panic  of  1893 

Within  a  little  more  than  a  month  after  Mr.  Eckels  assumed 
charge  of  the  Currency  Bureau  the  country  was  plunged  into  one 
of  the  most  violent  and  memorable  financial  panics  in  its  history. 
National,  State  and  private  banks  failed  in  quick  succession,  and 
the  business  of  the  entire  country  became  paralyzed.  During  the 
six  months  immediately  following  Mr.  Eckels'  induction  into  office, 
one  hundred  and  fifty-eight  national  banks  suspended  and  closed 
their  doors,  sixty-five  of  which  were  found  to  be  insolvent  and 
were  placed  in  the  hands  of  receivers,  eighty-six  resumed  business 
and  seven  were  placed  in  the  hands  of  bank  examiners  in  expecta- 
tion of  their  resumption.  The  weakest  banks  were  the  first  to 
succumb.  Many  failures  were  due  to  speculation,  and  some  to 
dishonesty.  In  some  communities  depositors  were  seized  with 
panic,  making  it  impossible  for  the  banks  to  meet  their  demands, 
and  numerous  suspensions  occurred  where  no  stigma  attached  to 
the  management,  and  the  banks  were  in  a  solvent  condition. 

During  this  trying  ordeal,  such  as  no  Comptroller  of  the  Cur- 
rency ever  was  called  upon  before  to  undergo,  Mr.  Eckels,  inex- 
perienced as  he  was,  even  in  the  detail  workings  of  the  Bureau, 
discharged  the  onerous  duties  of  the  office  with  rare  skill  and  good 
judgment,  and  not  only  quickly  disarmed  the  opposition  invoked 
by  his  appointment,  but  inspired  the  confidence  of  the  entire  bank- 
ing and  business  interests  of  the  country  and  contributed  very 
materially  toward  allaying  the  excitement  superinduced  by  the 
panic  and  the  restoration  of  confidence. 

Perhaps  no  one  connected  with  the  Treasury  Department  at 
that  time  shared  with  Mr.  Eckels  the  strain  of  the  trying  ordeal 
of  this  panic  more  than  the  writer,  who  was  then  the  Comptroller's 
secretary,  or  had  equal  opportunity  for  knowing  how  skilfully, 
manfully  and  energetically  he  met  and  handled  the  situation.  For 


ROMANCE  AND  TRAGEDY  OF  BANKING  191 

weeks  there  was  no  rest,  night  or  day.  Every  hour  of  the  day  and 
late  into  the  night  telegram  after  telegram  was  received  announc- 
ing additional  suspensions  of  banks  or  new  complications  which 
had  to  be  promptly  met.  As  many  as  thirty  suspensions  occurred 
in  a  single  day,  and  for  a  time  it  looked  as  if  every  national  bank 
in  the  system  would  succumb.  Telegrams  from  bank  examiners 
and  bankers  came  in  such  quick  succession  that  the  entire  time 
of  the  Comptroller  and  the  writer  was  occupied  in  translating 
cipher  messages  and  in  sending  replies  or  instructions.  Messages 
came  so  thick  and  fast  that  it  was  impossible  to  file  them  away  in 
any  order  for  reference,  and  the  expedient  was  resorted  to  of  fil- 
ing each  day's  messages  on  a  spindle  marked  with  the  date  of  their 
receipt,  until  there  was  a  spindle  for  every  day  in  the  week,  and 
a  row  for  each  week,  with  telegrams  six  inches  deep  on  each  file. 

Among  the  stream  of  messenger  boys  who  poured  into  the 
office  all  day  long  was  one  who  had  a  defective  or  blind  eye,  whom 
Mr.  Eckels  called  "The  bird  of  evil  omen."  Every  message  he 
delivered  announced  another  suspension,  so  that  whenever  this 
boy  entered  the  Comptroller's  room  Mr.  Eckels  would  remark, 
"Here  comes  another  bust." 

The  greatest  difficulty,  however,  that  Mr.  Eckels  encountered 
during  this  trying  occasion  was  in  quickly  finding  reliable  and 
competent  men  to  place  in  charge  of  the  suspended  associations, 
either  as  examiner  or  receiver.  All  of  the  examiners  in  the  sec- 
tions where  suspensions  were  most  numerous  were  already  in 
charge  of  failed  banks,  and  some  of  them  were  in  charge  of  sev- 
eral, with  an  assistant  assigned  to  each  to  manage  its  affairs 
under  their  supervision,  and  every  available  man  who  had  had 
any  previous  experience  as  a  receiver  or  examiner  was  pressed 
into  service  and  given  an  appointment. 

When  a  national  bank  closes  its  doors  it  is  necessary  to  place 
a  representative  of  the  Comptroller  in  charge  of  its  affairs  as 
promptly  as  posdble,  in  order  to  collect  and  protect  maturing 
paper  and  the  interests  of  all  the  creditors  alike,  so  that  no  cred- 
itor will  secure  preference  over  another  by  withdrawal  of  his 
deposit. 

Considering  the  haste  with  which  the  Comptroller  was  com- 
pelled to  act  in  making  his  selections,  and  his  lack  of  knowledge 


192  ROMANCE  AND  TRAGEDY  OF  BANKING 

of  the  antecedents  of  many  of  the  men  appointed  to  take  charge 
of  banks,  it  is  remarkable  that  so  few  mistakes  were  made  and  that 
such  good  judgment  was  displayed  by  those  who  were  appointed 
receivers  in  the  management  of  the  affairs  of  their  trusts  and  the 
good  results  attained,  many  of  whom  never  having  had  any  experi- 
ence in  the  liquidation  of  an  insolvent  bank. 


The  Model  Receiver 

Of  the  large  number  of  receivers  appointed,  and  of  examiners 
placed  in  charge  of  suspended  institutions,  only  one  man  proved 
to  be  a  recreant  to  his  trust  and  the  confidence  reposed  in  him 
by  the  Comptroller.  This  man  had  been  connected  with  the  Comp- 
troller's office  for  years  previous  to  the  panic  of  1893,  and  had 
such  a  record  for  efficiency  and  good  results  obtained  for  cred- 
itors, that  he  was  regarded  as  the  "banner  receiver"  of  the  office 
and  a  model  for  imitation  by  all  newcomers.  He  was  appointed 
receiver  for  several  banks  during  the  panic,  had  been  receiver  for 
others  before  Mr.  Eckels'  appointment  as  Comptroller,  and  was 
the  principal  reliance  of  the  office  to  instruct  other  receivers  in 
their  work.  It  was  discovered  later  that  in  a  number  of  receiver- 
ships under  his  charge  he  had  systematically  appropriated  to  his 
own  use  part  of  his  cash  collections,  diamonds,  jewelry  and  other 
valuable  assets  of  the  trusts,  and  did  it  in  such  an  adroit  manner 
that  it  was  impossible  to  obtain  such  proofs  against  him  as  would 
sustain  a  prosecution  or  a  claim  against  his  bondsmen. 

Ex-Convict  Receiver  and  Examiner 

The  most  remarkable  case,  however,  was  that  of  the  appoint- 
ment of  an  ex-convict  as  bank  examiner  and  receiver.  Previous 
to  his  appointment  this  man  called  in  person  upon  Mr.  Eckels 
and  presented  letters  of  recommendation  from  a  number  of  the 
leading  public  men  of  his  State.  He  was  a  man  of  good  appear- 
ance and  address,  and  he  made  such  a  favorable  impression  upon 
Mr.  Eckels  that  he  concluded  to  avail  himself  of  his  services.  He 
appointed  him  a  national  bank  examiner,  and  assigned  him  to 
duty  in  charge  of  a  failed  bank,  of  which  he  was  later  appointed 


ROMANCE  AND  TRAGEDY  OF  BANKING  193 

receiver.  After  he  had  been  in  the  service  several  months,  Mr. 
Eckels  received  a  communication  from  a  party  in  the  city  where 
the  bank  was  located,  stating  that  this  man  was  an  ex-convict, 
having  served  a  term  of  five  years  in  the  penitentiary.  He  looked 
up  the  recommendations  on  which  he  was  appointed  and  refused 
to  believe  that  the  accusation  could  be  true.  He  wired  the  re- 
ceiver in  cipher  informing  him  of  the  charge  that  had  been  made 
against  him  and  requested  an  immediate  reply  by  wire  confirm- 
ing or  denying  the  accusation.  He  was  astounded  upon  receiving 
a  reply  acknowledging  the  truth  of  the  charge  and  stating  that 
a  full  explanation  by  mail  would  follow.  The  mail  promptly 
brought  the  explanation,  in  which  this  man  candidly  admitted 
that  several  years  previously  he  had  been  convicted  of  a  criminal 
offense,  stated  its  nature,  and  had  been  sentenced  to  and  served 
a  term  in  the  penitentiary.  He  stated  further  that  he  was  quite 
a  young  man  when  he  went  astray,  had  paid  the  penalty  of  his 
wrongdoing,  and  after  serving  his  sentence  had  returned  to  the 
same  city  in  which  he  was  tried  and  convicted  determined  to  start 
life  anew  and  re-establish  himself  in  the  confidence  of  his  friends 
and  the  community.  He  invited  the  closest  scrutiny  into  his  life 
before  his  conviction  and  his  career  subsequent  to  his  release  from 
the  penitentiary,  and  also  his  acts  as  examiner  and  receiver.  He 
advised  the  Comptroller  that  the  party  who  informed  on  him  was 
an  applicant  for  appointment  as  attorney  for  his  trust,  but  as 
he  did  not  believe  that  it  would  be  for  the  best  interests  of  the 
receivership  to  appoint  him,  he  declined  to  recommend  the  ap- 
pointment, thereby  incurring  his  displeasure  and  resulting 
exposure. 

Mr.  Eckels  made  careful  inquiry  into  the  history  of  this  re- 
ceiver and  with  the  exception  of  the  offense  for  which  he  was  con- 
victed learned  nothing  to  his  discredit.  He  also  made  a  thor- 
ough examination  of  the  receivership  and  found  everything  satis- 
factory and  the  books  in  excellent  condition. 

The  friends  of  this  man,  among  whom  were  some  men  of  prom- 
inence, had  absolute  confidence  in  him  and  the  sincerity  of  his 
declared  purpose  to  redeem  himself  if  given  an  opportunity  to  do 
right,  and  stood  by  him.  They  urged  Mr.  Eckels  to  continue  him 
in  office  and  he  did  so  for  several  months  thereafter.  Finally  he 


194  ROMANCE  AND  TRAGEDY  OF  BANKING 

concluded  that  he  was  assuming  too  great  a  responsibility  in  con- 
tinuing a  man  in  a  fiduciary  position  whom  he  knew  to  have  served 
a  term  in  the  penitentiary,  and  would  be  justly  subject  to  censure 
if  anything  went  wrong.  He  therefore  reluctantly,  as  he  said  at 
the  time,  requested  his  resignation.  The  resignation  was  promptly 
forwarded  and  a  successor  was  appointed.  All  the  assets  of  the 
trust  were  carefully  checked  up,  every  dollar  that  came  into  the 
hands  of  the  receiver  was  fully  accounted  for,  and  everything 
found  to  be  in  a  satisfactory  condition.  During  the  brief  period 
of  this  man's  connection  with  the  Treasury  Department  there  was 
not  a  fault  to  be  found  with  his  record.  He  discharged  his  duty 
honestly,  faithfully  and  efficiently,  and  it  was  with  great  regret 
that  Mr.  Eckels  felt  constrained  to  request  his  resignation. 

In  later  years  it  was  learned  at  the  office  of  the  Comptroller 
that  he  went  wrong  again.  He  became  involved  in  other  ques- 
tionable transactions,  and  the  reports  concerning  him  were  to  his 
discredit. 

Those  who  were  connected  with  the  Comptroller's  office  at  that 
time  and  were  familiar  with  this  man's  history  always  entertained 
the  opinion  that  perhaps  if  he  had  been  trusted  and  encouraged 
he  might  have  developed  into  an  honest  and  reputable  citizen. 
Who  can  tell?  But  the  exposure  of  his  penitentiary  career  and 
his  removal  from  office  in  consequence  sent  him  out  into  the  world 
again  broken  in  spirit  and  discouraged,  like  Bob  Brierly  in  the 
"Ticket-of-Leave  Man,"  with  the  brand  of  an  ex-convict  barring 
the  way  to  his  making  an  honest  living  in  any  position  of  trust. 
The  way  of  the  transgressor  is  hard  and  this  man  was  forced  to 
realize  it. 

Suspensions  During  the  Panic  of  1893 

Returning  to  the  subject  of  the  panic  of  1893,  of  the  one 
hundred  and  fifty-eight  national  banks  that  suspended  during  the 
report  year  of  that  period,  thirty-eight  were  in  the  Southern 
States,  forty-nine  in  the  Western  States,  sixty-six  in  the  Pacific 
States  and  Territories,  two  in  the  New  England  States,  and 
three  in  the  Middle  States.  Of  the  suspensions  in  the  Southern 
States  nineteen  resumed  business  and  the  same  number  failed.  Of 
those  that  suspended  in  the  Western  States  thirty-one  resumed 


ROMANCE  AND  TRAGEDY  OF  BANKING  195 

business  and  seventeen  failed.  In  the  Pacific  States  thirty-six 
resumed  business  and  twenty-five  went  into  the  hands  of  receivers. 
Receivers  were  appointed  for  both  of  the  banks  that  suspended  in 
the  New  England  States  and  for  two  of  those  in  the  Middle 
States. 

During  the  first  eight  months  of  1893,  Bradstreet's  Agency 
reported  four  hundred  and  fifteen  bank  failures  of  all  kinds, 
national,  State  and  private,  and  loan  and  trust  companies.  The 
assets  of  these  four  hundred  and  fifteen  institutions  were  reported 
as  aggregating  $94,291,348,  and  their  liabilities  as  $97,193,530. 

A  large  percentage  of  the  national  banks  that  were  compelled 
to  close  their  doors  were  unquestionably  solvent,  as  their  early 
resumption  of  business  fully  demonstrated.  They  were  forced  to 
suspend  because  of  their  inability  to  realize  immediately  on  their 
assets  cash  sufficient  to  meet  the  demands  of  their  panic-stricken 
depositors,  without  a  ruinous  sacrifice.  While  the  suspension  of 
a  bank  under  ordinary  conditions  would  be  presumptive  evidence 
of  insolvency  and  justify  the  placing  of  the  association  in  the 
hands  of  a  receiver,  Mr.  Eckels  very  wisely  drew  a  distinction 
between  a  suspended  solvent  institution  and  one  which  he  knew 
or  had  good  reason  to  believe  was  insolvent.  The  former  he 
assisted  in  every  proper  way  and  encouraged  them  to  resume 
business,  and  the  latter  he  immediately  placed  in  the  hands  of 
receivers  to  wind  up  their  affairs.  No  bank  was  permitted  to 
resume  business  whose  assets  were  not  believed  to  be  sufficient 
to  pay  its  liabilities  to  depositors  and  other  creditors  in  full  over 
and  above  an  unimpaired  capital. 

In  some  instances  Mr.  Eckels  was  severely  criticised  by  depos- 
itors who  were  clamorous  for  their  money,  but  he  calmly  pursued 
the  even  tenor  of  his  way  and  did  what  he  believed  to  be  for  the 
best  interests  of  all  concerned. 

In  replying  to  some  of  his  critics  who  demanded  the  appoint- 
ment of  receivers  for  suspended  associations  which  he  had  good 
reason  to  believe  were  solvent  and  were  able  to  pay  their  creditors 
in  full,  he  stated  that  he  proposed  to  exercise  to  the  fullest  extent 
the  discretion  vested  in  him  by  law,  by  aiding  in  every  legitimate 
manner  every  suspended  solvent  institution  to  resume  business  at 
the  earliest  possible  moment  as  the  best  means  of  quickly  rcstor- 


196  ROMANCE  AND  TRAGEDY  OF  BANKING 

ing  confidence  and  a  return  to  normal  conditions,  and  suggested 
that  his  critics  would  better  contribute  toward  this  end  by  co- 
operating with  him  in  this  endeavor  instead  of  finding  fault  with 
him  in  his  efforts  to  do  so.  The  results  of  Mr.  Eckels'  policy  in 
this  respect  justified  the  course  that  he  pursued  and  proved  the 
wisdom  of  his  judgment. 

Shrinkage  in  Assets  and  Liabilities 

A  comparison  of  the  figures  in  the  report  of  the  Comptroller 
for  1893  with  those  of  the  report  of  1892  shows  a  shrinkage  of 
$400,531,613  in  the  aggregate  resources  and  liabilities  of  the 
national  banks  during  that  period,  and  indicates  the  extent  to 
which  the  national  banks  of  the  country  suffered  from  the  excep- 
tionally severe  monetary  stringency  that  prevailed  chiefly  between 
May  4  and  October  3  of  that  year.  During  this  period  $298,- 
806,487  and  $79,313,076  of  individual  and  bank  deposits,  respec- 
tively, were  withdrawn  from  the  banks.  To  meet  these  with- 
drawals, loans  and  discounts  were  reduced  $318,767,691,  and  due 
from  banks  and  bankers  $51,198,856.  To  provide  against  fur- 
ther withdrawals  of  deposits  the  banks  increased  their  liabilities 
for  money  borrowed  $36,615,092,  and  added  to  their  circulation 
$31,265,616,  of  which  amount  $27,888,905  was  taken  out  between 
July  and  October,  1893.  The  cash  resources  of  the  banks 
amounted  to  $32,559,267  less  on  July  12  than  on  May  4,  1893, 
but  between  the  latter  date  and  October  3,  of  the  same  year,  they 
increased  $59,520,100,  aggregating  on  the  latter  date  $369,- 
862,637,  the  largest  amount  ever  held  up  to  that  time. 

This  showing,  in  the  face  of  continued  heavy  withdrawals  of 
deposits,  Mr.  Eckels  stated  in  his  report  for  1893,  was  the  most 
practical  demonstration  that  could  be  had  of  the  solvency  of  the 
national  banks  as  a  whole  and  their  ability  in  an  emergency  to 
rapidly  convert  their  assets  into  cash. 

Cause  of  the  Crisis  of  1893 

Immediately  following  this  panic  and  since,  various  theories 
were  and  have  been  advanced  by  financial  experts  and  political 
economists  as  to  the  causes  which  produced  this  crisis.  Hetero- 


ROMANCE  AND  TRAGEDY  OF  BANKING  197 

geneous  and  contradictory  financial  legislation  during  the  preced- 
ing twenty  years  was  held  by  some  to  be  responsible.  The  legis- 
lation of  that  period,  it  was  contended,  consisted  of  a  series  of 
compromises  between  a  desire  to  maintain  an  honest  standard  of 
values  and  an  effort  to  conciliate  financial  heresies,  instead  of  a 
determination  to  combat  them.  Inelasticity  of  our  currency  and 
the  consequent  inability  of  the  banks  to  issue  circulation  sufficient 
to  meet  the  demands  of  their  depositors  and  customers,  without 
an  investment  of  an  equal  amount  in  United  States  bonds,  was 
held  to  be  another  cause  for  the  panic,  implying  thereby  that 
there  was  a  scarcity  of  circulation  at  that  time.  Others  still 
claimed  that  the  inception  of  panics  generally  may  be  traced  to 
currency  inflation  and  the  speculation  that  an  inflated  currency 
usually  promotes  with  all  its  kindred  evils. 

While  all  these  causes,  and  numerous  others  which  have  been 
advanced  as  having  had  an  influence  in  bringing  about  the  general 
disturbance  that  occurred  in  1893,  the  primary  causes  which 
led  to  this  panic  may  be  looked  for  and  found  in  the  conditions 
described  by  Mr.  Lacey  in  his  annual  report  for  1891,  in  which 
he  attributed  the  panic  of  1890  to  have  been  due  to  overtrading, 
unhealthful  expansion,  investments  in  speculative  securities  and 
in  various  forms  of  corporate  enterprises  and  development  in  new 
and  untried  fields,  and  in  undue  expansion  of  credits  by  the  banks. 

The  panic  of  1893  had  its  inception  in  the  financial  disturb- 
ance of  1890.  The  temporary  lull  in  that  storm  was  but  the 
harbinger  of  the  tempest  that  broke  over  the  country  with  cy- 
clonic ferocity  and  culminated  in  the  disastrous  panic  of  1893, 
which,  while  clarifying  the  atmosphere,  scattered  in  its  wake 
wreckage  that  required  years  to  remove. 

In  commenting  upon  the  causes  which  led  to  the  panic  of  1893, 
Mr.  Eckels,  in  his  annual  report  for  that  year,  prepared  only  a 
few  months  after  his  appointment  as  Comptroller,  stated  that — 

The  financial  situation  of  the  past  few  months  was 
not  the  result  of  either  a  lack  in  the  volume  of  currency, 
of  which  there  was  a  plethora,  or  a  want  of  elasticity  in 
the  system  of  issuing  it,  but  arose  from  a  loss  of  confi- 
dence on  the  part  of  the  people  in  the  solvency  of  the  dis- 
tinctively monetary  institutions  of  the  country. 


198          ROMANCE  AND  TRAGEDY  OP  BANKING 

It  is  worthy  of  note  and  of  serious  consideration  that 
at  the  very  time  the  scarcity  of  currency  for  business 
purposes  was  at  its  height,  the  country's  volume 
of  currency  was  increasing  the  most  rapidly,  and  the 
amount  per  capita  was  much  larger  than  in  any  recent 
years.  Under  the  same  peculiar  condition  of  affairs  which 
marked  the  monetary  situation  from  May  to  September, 
no  system,  no  matter  how  elastic,  or  volume  of  currency 
however  large,  could  afford  relief.  So  long  as  confidence 
is  destroyed  and  credit  wanting,  money  hoarding  will  go  on 
and  additional  issues  but  add  to  the  hoardings  and  give 
but  little,  if  any,  actual  relief.  On  the  other  hand,  when 
confidence  and  credit  abound  there  exists  little  need  for  an 
abundant  circulating  medium,  because  under  such  a  condi- 
tion of  affairs  the  amount  of  actual  money  required  to 
transact  the  daily  business  affairs  of  life  is  reduced  to  a 
minimum. 

Strangely  in  contrast  are  these  views  with  the  financial  theory 
which  years  later  led  to  the  enactment  of  what  was  known  as 
"The  Emergency  Currency  Law,"  which  required  five  hundred 
millions  of  dollars  to  be  accumulated  in  the  Treasury  of  the 
United  States  for  the  purpose  of  preventing  or  arresting  panics 
such  as  was  experienced  in  1893. 

The  panic  of  1893  was  not  the  result  of  faulty  legislation. 
Neither  was  it  due  to  the  inelasticity  of  our  currency,  nor  to  an 
insufficiency  or  superabundance  of  its  volume.  It  had  its  origin, 
as  Mr.  Eckels  stated,  in  a  loss  of  confidence  in  the  solvency  of  the 
banks,  and  this  loss  of  confidence  was  inspired  by  a  general  knowl- 
edge of  the  unsound  conditions  in  private  and  in  public  life,  de- 
scribed by  Mr.  Lacey  in  his  report  for  1891,  and  the  speculative 
and  venturesome  character  of  the  investments  and  loans  in  which 
the  funds  of  many  of  the  banks  had  been  risked. 

The  five  hundred  millions  of  dollars  of  emergency  circulation 
held  in  reserve  in  the  Treasury  of  the  United  States,  if  promptly 
let  loose  at  the  opportune  time,  would  no  doubt  have  arrested  a 
panic,  as  was  demonstrated  in  later  years,  but  it  would  not  have 
prevented  one.  A  redundancy  of  circulation  for  immediate  use 
in  an  emergency  is  no  more  a  guaranty  against  a  financial  panic 
than  the  existence  of  an  effective  fire  department  is  an  insurance 


199 

against  fire.  If  promptly  put  in  operation,  they  may  ameliorate 
the  situation  or  check  the  conflagration,  but  neither  will  prevent 
the  outbreak.  Confidence  alone  in  the  stability  of  our  banking 
institutions  will  prevent  panics,  and  anything  that  tends  toward 
inspiring  confidence  in  the  soundness  of  our  banks  and  the  integ- 
rity and  conservatism  of  their  management  will  minimize  the  lia- 
bility to  panics  or  monetary  disturbances  of  any  kind. 

At  a  dinner  given  at  the  Union  League  Club  in  New  York  City 
on  the  evening  of  July  18,  1893,  Mr.  Eckels,  in  referring  to  the 
panic  of  that  year,  said : 

In  conservative  business  centers  the  failures  have  been 
few,  either  in  banking  or  in  other  lines.  Bad  banking  at 
any  and  all  times  is  dangerous  and  must  inevitably  bring 
disaster  to  those  who  engage  in  it.  The  present  strengency 
has  simply  hastened  the  closing  of  some  banks  because  they 
were  inherently  weak.  Others  have  been  closed  as  a  re- 
sultant effect  of  having  kept  alive  the  operations  of  specu- 
lators in  the  extreme  west  and  in  portions  of  the  south. 
The  art  has  not  yet  been  discovered  of  making  something 
out  of  nothing,  and  the  financier  who  stakes  his  all  upon 
an  unbuilt  city  reaching  out  into  the  waste  places  of  the 
earth  must  bring  about  the  ruin  of  his  own  and  kindred 
institutions  which  have  trusted  in  him  and  pinned  their 
faith  in  assets  yet  unborn. 

The  simile  of  the  "unbuilt  city"  used  by  Mr.  Eckels  could  have 
been  applied  also  to  speculative  ventures  in  mining,  manufactur- 
ing and  various  other  developing  schemes  which  the  banks  during 
that  period  fostered  and  in  many  instances  their  officers  and  di- 
rectors were  interested  in  promoting. 

The  equipment  of  trunk  railway  lines  with  the  block  system 
and  other  safety  devices  against  accident  has  materially  increased 
the  security  of  the  traveler,  but  has  not  made  collisions  impos- 
sible. The  system  will  accomplish  its  purpose  if  the  men  who 
operate  the  machinery  faithfully  and  diligently  discharge  their 
duties,  and  the  engineer  who  runs  the  train  observes  and  heeds 
the  danger  signals  with  which  he  is  familiar.  But  when  one  neg- 
lects his  duty  by  failing  to  set  the  signals,  or  the  other  by  disre- 


200          ROMANCE  AND  TRAGEDY  OF  BANKING 

garding  them,  and  plunges  ahead  into  uncertainty,  disaster  is 
the  inevitable  result,  although  the  system  is  not  responsible. 

So,  too,  is  it  with  banking.  If  the  directors  of  banks  honestly 
and  faithfully  discharge  the  duties  that  devolve  upon  them  by 
law,  equip  their  banks  with  the  block  system  of  prudence  and 
conservatism  and  eliminate  all  hazardous  ventures  and  specula- 
tive risks,  the  security  of  the  depositor  will  be  augmented  in  the 
same  degree  that  the  safety  of  the  traveler  has  been  increased  by 
the  adoption  of  modern  safety  devices. 

Personal  equation  is  the  basis  of  confidence  in  banking,  and 
confidence  can  be  inspired  and  maintained  only  through  an  abso- 
lute reliance  upon  the  honesty,  conservatism  and  good  judgment 
of  the  men  who  direct  and  manage  our  financial  institutions. 

Most  Important  National  Bank  Failures  During  the  Panic 

of  1893 

The  two  largest  failures  of  national  banks  that  occurred  in 
1893  were  the  Columbia  National  and  Chemical  National  Banks 
of  Chicago,  111.  The  capital  stock  of  each  of  these  banks  was 
$1,000,000,  and  their  liabilities  were  $2,559,885  and  $2,910,745, 
respectively.  The  first-named  institution  was  the  parent  bank 
of  what  was  known  as  the  Zimri  Dwiggins  chain  of  banks,  or  the 
Dwiggins  System,  as  contra-distinguished  from  the  national 
banking  system. 

The  Dwiggins  theory  of  banking  seems  to  have  been  to  organ- 
ize a  bank  with  sufficient  capital  for  one  institution  and  to  estab- 
lish branches  at  different  points  with  no  apparent  connection  with 
each  other,  for  the  purpose  of  feeding  the  parent  institution  with 
deposits,  the  capital  of  the  latter  being  common  to  all,  and  the 
money  necessary  for  each  being  furnished  by  the  parent  bank 
as  needed. 

The  United  States  Loan  and  Trust  Company,  an  Indiana 
corporation,  with  an  office  in  Chicago,  was  an  adjunct  of  the 
Columbia  National  Bank  and  the  transactions  of  the  two  were 
so  closely  interwoven  that  they  were  practically  one  institution, 
and  Mr.  Dwiggins  was  the  whole  concern.  He  was  the  executive 
head  of  both  banks  and  appears  to  have  controlled  the  affairs  of 


ROMANCE  AND  TRAGEDY  OF  BANKING  201 

each  without  consultation  with  the  directors  of  either.  As  presi- 
dent of  the  bank  he  appears  to  have  contracted  with  himself  as 
president  of  the  Trust  Company,  and  vice  versa,  and  did  not 
seem  to  think  it  necessary  to  leave  any  written  evidence  of  his 
dealings  between  the  two  corporations. 

The  original  purpose  for  which  the  Loan  and  Trust  Company 
was  organized  was  to  negotiate  farm  mortgages,  but  about  Feb- 
ruary, 1892,  the  company  was  reorganized  and  distributed  all 
of  the  assets  then  in  its  possession  among  its  stockholders.  The 
object  of  the  reorganized  institution  was  to  deal  in  the  stocks  of 
country  banks.  This  Trust  Company  appears  to  have  entered 
upon  its  existence  without  a  cent  of  paid-in  capital.  Whatever 
capital  the  stockholders  contributed  at  the  time  of  its  original 
organization  was  returned  to  them  at  the  time  of  its  reorganiza- 
tion. In  place  of  capital  stock  the  company  issued  $500,000  of 
what  were  designated  "income  bonds."  The  promoters  of  this 
enterprise  offered  these  bonds  to  anyone  who  was  foolish  enough 
to  buy  them.  The  purchaser  then  stood  in  the  position  of  a 
stockholder  of  the  Trust  Company,  his  bond  being  equivalent  to 
a  certificate  of  stock.  The  money  derived  from  the  sale  of  the 
income  bonds  was  to  be  invested  in  the  stocks  of  country  banks. 
The  plan  contemplated  further  that  when  $250,000  of  country 
bank  stock  was  accumulated  debenture  bonds  would  be  issued  in 
a  like  amount,  a  series  of  bonds  for  each  $250,000  of  stock. 
These  bonds  were  to  bear  interest  at  the  rate  of  five  per  cent,  per 
annum,  payable  from  the  dividends  declared  on  the  country  bank 
stock.  The  debenture  bonds  were  called  "collateral  trust  gold 
bonds."  It  was  expected  to  sell  these  bonds  at  par,  and  the 
holders  of  the  income  bonds,  when  the  collateral  trust  gold  bonds 
were  disposed  of,  would  have  in  the  treasury  an  amount  equal  to 
the  original  sum  they  invested  and  be  in  a  position  to  repeat  the 
process. 

Had  this  scheme  been  successful  the  United  States  Loan  and 
Trust  Company  would  have  finally  accumulated  the  stock  of  all 
the  country  banks  in  the  Dwiggins  chain,  and  when  the  last 
$250,000  of  stock  had  been  accumulated  and  the  collateral  trust 
gold  bonds  issued  thereon  and  sold,  the  original  purchasers  of 
the  income  bonds  would  have  had  returned  to  them  the  amount 


202  ROMANCE  AND  TRAGEDY  OF  BANKING 

they  originally  invested.  The  source  of  profit  to  the  holder  of 
income  bonds  was  the  country  bank  stock.  It  was  the  belief  that 
the  average  annual  dividends  on  this  stock  would  exceed  five  per 
cent. 

Seventy-five  per  cent,  of  whatever  surplus  was  accumulated 
over  and  above  five  per  cent,  was  to  inure  to  the  holders  of  the 
income  bonds  and  the  remaining  twenty-five  per  cent,  to  the 
holders  of  the  original  stock  of  the  United  States  Loan  and  Trust 
Company. 

Operated  honestly  this  banking  scheme  probably  might  have 
worked  successfully  and  profitably,  with  little  chance  for  the 
holders  of  the  income  bonds  to  lose  anything.  But  it  was  not  so 
conducted  by  the  Trust  Company.  Instead  of  selling  the  income 
bonds  for  cash  and  investing  the  proceeds  in  country  bank  stock, 
Dwiggins,  acting  for  the  Trust  Company,  would  call  the  stock- 
holders of  the  country  bank  together  and  arrange  to  trade  the 
income  bonds  for  the  bank  stock  at  par,  and  as  an  evidence  of 
good  faith  would  agree  to  deposit  with  the  bank  an  amount  of 
money  equal  to  the  value  of  the  stock  sought  to  be  purchased. 
After  consummating  the  trade  he  would  deposit  with  the  country 
bank  the  amount  agreed  upon  and  take  the  bank's  certificate  of 
deposit  therefor. 

Up  to  this  point  the  transaction  appeared  to  be  honest,  but 
just  at  this  stage  the  peculiar  financiering  of  Dwiggins  came 
into  play.  As  president  of  the  Loan  and  Trust  Company  he 
had  possession  of  the  country  bank  stock  and  the  certificate  of 
deposit  in  the  country  bank.  Then  as  president  of  the  Columbia 
National  Bank  he  would  purchase  from  himself  as  president  of 
the  Trust  Company  the  certificate  of  deposit  in  the  country  bank 
for  its  face  value,  taking  the  precaution  to  have  the  certificate 
indorsed  to  the  bank  without  recourse.  In  this  manner  the  Loan 
and  Trust  Company  would  succeed  in  disposing  of  its  income 
bonds  and  the  bank  would  relieve  the  company  of  the  burden  of 
its  contract.  As  president  of  the  Loan  and  Trust  Company  he 
would  also  make  an  absolute  or  conditional  sale  of  the  income 
bonds  to  a  country  bank  and  take  in  payment  therefor  a  certifi- 
cate of  deposit  from  the  bank  for  the  purchase  price.  Then  as 
president  of  the  Columbia  National  Bank  he  would  purchase  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  203 

certificate  of  deposit  from  himself  as  president  of  the  Trust  Com- 
pany at  its  face  value. 

With  a  nominal  investment  on  the  part  of  the  Trust  Company 
and  an  actual  investment  on  the  part  of  the  bank  of  from  two  to 
three  hundred  thousand  dollars,  Dwiggins,  between  the  date  of 
reorganization  of  the  Trust  Company  in  February,  1892,  and 
September  of  the  same  year,  succeeded  in  disposing  of  $250,000 
of  the  income  bonds  and  accumulated  $250,000  of  bank  stock, 
while  the  Columbia  National  Bank,  through  Dwiggins,  its  execu- 
tive head,  had  purchased  from  himself  as  president  of  the  Trust 
Company  at  least  $250,000  of  certificates  of  deposits  in  country 
banks,  most  of  which  certificates  were  considered  worthless  at  the 
time  the  Columbia  National  Bank  failed. 

Dwiggins  apparently  was  more  interested  in  the  Loan  and 
Trust  Company  than  he  was  in  the  Columbia  National  Bank.  As 
a  net  result  of  his  numerous  transactions,  he  unloaded  upon  the 
bank  over  $241,000  of  the  collateral  trust  and  gold  bonds  and 
not  less  than  $250,000  of  certificates  of  deposit  in  the  country 
banks,  while  the  Trust  Company  succeeded,  without  any  invest- 
ment on  its  part,  in  getting  possession  of  $231,000  of  the  bank's 
discounts. 

The  transactions  of  Dwiggins  were  responsible  for  the  failure 
of  the  Columbia  National  Bank,  as  the  bank  appears  to  have  been 
used  simply  as  a  feeder  for  the  Trust  Company.  The  shareholders 
of  the  bank  were  assessed  $750,000  toward  paying  its  liabilities 
to  depositors  and  other  creditors,  but  $47,350  of  this  amount  was 
returned  to  them  in  cash,  the  assessment  having  been  excessive. 
This  is  explained  by  the  fact  that  the  one  hundred  per  cent, 
assessment  levied  by  the  Comptroller,  if  collected  in  full,  would 
have  been  more  than  sufficient  to  pay  the  deficiency  between  the 
amount  ralized  from  the  assets  and  the  liabilities  of  the  bank  to 
its  creditors.  Some  of  the  stockholders  paid  the  one  hundred  per 
cent,  in  full,  while  others  responded  in  part  only,  or  were  unable 
to  pay  anything.  The  law  provides  that  the  shareholders  of 
every  national  banking  association  shall  be  held  individually  re- 
sponsible, equally  and  ratably,  and  not  one  for  another,  for  all 
contracts,  debts  and  engagements  of  the  association  to  the  extent 
of  the  par  of  their  stock.  The  amount  returned  to  the  share- 


204          ROMANCE  AND  TRAGEDY  OF  BANKING 

holders,  therefore,  represented  the  excess  collected  from  those 
who  paid  one  hundred  per  cent,  over  and  above  the  ratable  amount 
for  which  they  were  liable. 

The  losses  on  assets  compounded  or  sold  under  order  of  the 
court  amounted  to  nearly  a  million  and  one-half  dollars.  The 
affairs  of  the  receivership  were  finally  closed,  September  30,  1905, 
after  the  payment  of  dividends  to  depositors  and  other  creditors 
of  eighty-one  per  cent. 

The  failure  of  this  bank  was  probably  the  most  disastrous 
of  any  of  the  national  bank  failures  that  occurred  during  the 
panic  of  1893.  Thirty  or  forty  small  banks  were  involved.  These 
banks  were  scattered  throughout  the  States  of  Illinois,  Indiana 
and  Michigan.  They  belonged  to  the  Dwiggins  chain,  and  all 
collapsed  with  the  failure  of  the  parent  institution. 

The  Chemical  National  Bank  of  Chicago 

The  Chemical  National  Bank  of  Chicago  was  organized 
December  15,  1891,  with  a  capital  stock  of  one  million  dollars. 
It  suspended  in  May,  1893,  but  was  not  placed  in  the  hands  of  a 
receiver  until  July  21  following,  its  affairs  in  the  meantime  hav- 
ing been  in  charge  of  a  national  bank  examiner. 

The  failure  of  this  institution  was  due  to  incompetent  and 
improper  management.  Apparently  the  bank  was  organized, 
and  had  been  freely  used  during  its  short  existence,  to  further 
the  interests  of  its  directors  and  some  of  the  larger  stockholders. 
Of  the  fifteen  directors  of  the  association  ten  were  either  them- 
selves directly  liable  to  the  bank  upon  their  personal  notes,  were 
indorsers  for  others,  or  were  interested  in  corporations  which 
owed  the  institution  an  amount  aggregating  at  least  $225,000. 
Seventy-one  of  the  shareholders,  owning  forty-seven  hundred  and 
seventy-two  shares  of  the  capital  stock,  owed  the  bank  nearly 
$700,000,  some  of  which  indebtedness  apparently  was  for  origi- 
nal stock  subscriptions.  The  general  character  of  the  securities 
held  for  loans  was  bad,  or  at  least  very  questionable,  and  some- 
thing like  $750,000  of  the  paper  held  was  of  doubtful  character, 
so  much  so  that  when  the  bank  applied  to  other  banks  for  re- 


ROMANCE  AND  TRAGEDY  OF  BANKING  205 

discounts  when  it  became  involved,  it  was  unable  to  obtain  assist- 
ance upon  the  security  offered. 

In  the  liquidation  of  the  bank  under  the  receivership  an  assess- 
ment of  $100,000,  or  ten  per  cent.,  was  levied  upon  the  stock- 
holders, of  which  amount  only  $63,644  was  collected.  The  total 
collections  from  all  sources  amounted  to  $1,712,489,  and  divi- 
dends amounting  to  93.40  per  cent.,  or  $1,424,484,  were  paid,  and 
the  receivership  was  finally  closed  May  2,  1900. 

Under  a  special  Act  of  Congress,  approved  May  12,  1892, 
any  national  bank  in  the  city  of  Chicago  was  authorized  to  estab- 
lish and  operate  a  branch  bank  on  the  grounds  of  the  Columbian 
Exposition,  for  a  period  of  not  exceeding  two  years,  beginning 
not  earlier  than  July  1,  1892,  and  closing  not  later  than  July  1, 
1894. 

Under  authority  of  this  Act  the  Chemical  National  Bank 
established  an  office  at  Jackson  Park  on  the  Exposition  grounds, 
but  as  the  Exposition  was  not  formally  opened  until  May  1,  1893, 
the  branch  office  hardly  commenced  business  before  the  parent 
institution  failed,  which  necessitated  the  closing  of  the  branch. 

This  branch  office  received  the  deposits  of  the  Exposition 
Company  as  well  as  those  of  exhibitors  and  others.  At  the  time 
of  the  failure  of  the  Chemical  National  Bank  and  the  closing  of 
the  branch  office,  a  large  amount  of  deposits  had  been  received  by 
the  latter  institution.  The  Board  of  Directors  of  the  Exposition 
paid  the  deposits  of  the  exhibitors  and  made  arrangements  with 
the  Northern  Trust  Company  to  do  the  banking  business  at  the 
Park. 

The  authorization  of  the  establishment  of  this  branch  on  the 
grounds  of  the  World's  Columbian  Exposition  and  a  similar  auth- 
ority authorizing  any  bank  or  trust  company  located  in  the  State 
of  Missouri  to  conduct  a  banking  office  on  the  grounds  of  the 
Louisiana  Exposition  at  St.  Louis,  approved  March  3,  1901,  are 
the  only  instances  of  the  authorization  by  Congress  of  the  privi- 
lege of  establishing  and  operating  a  branch  office  in  the  United 
States  by  a  national  bank  of  primary  organization.  While  the 
National  Bank  Act  does  not  specifically  prohibit  the  operations 
of  branch  banks,  the  implication  to  that  effect  is  clear,  and  it 
always  hag  been  held  that  what  is  not  specifically  authorized  by 


206  ROMANCE  AND  TRAGEDY  OF  BANKING 

the  Act  is  prohibited.  National  banks,  therefore,  are  permitted 
to  have  but  one  banking  house  or  office,  at  which  the  ordinary 
business  of  discount  and  deposit  must  be  conducted,  and  the 
United  States  District  Courts  have  held  that  they  cannot  lawfully 
receive  deposits,  cash  checks  or  do  any  of  the  ordinary  business 
of  the  bank  elsewhere.1 

Bank  failures  continued  throughout  the  remaining  years  of 
Mr.  Eckels'  administration  to  a  much  greater  extent  than  the 
yearly  average  number  during  the  preceding  periods.  From 
April  14,  1865,  the  date  of  the  first  national  bank  failure,  to 
December  31,  1897,  the  date  of  Mr.  Eckels'  retirement  from 
office,  three  hundred  and  sixty-nine  national  banks  were  placed 
in  the  hands  of  receivers.  Between  April  26,  1893,  and  Decem- 
ber 31,  1897,  the  period  covered  by  Mr.  Eckels'  term  as  Comp- 
troller, two  hundred  and  eighty  national  banks  suspended,  one 
hundred  and  eighty-one  of  which  were  placed  in  the  hands  of 
receivers,  or  forty-nine  per  cent,  of  the  total  number  of  receiver- 
ships from  the  beginning  of  the  national  banking  system. 

The  general  stagnation  in  business  throughout  the  entire 
country  which  followed  the  panic  of  1893  and  continued  for  sev- 
eral years,  largely  augmented  the  difficulties  attending  the  liqui- 
dation of  the  affairs  of  the  numerous  receiverships  resulting  from 
the  panic,  and  greatly  increased  the  labors  of  the  Currency 
Bureau.  Settlement  of  the  numerous  complications  arising  from 
these  failures  and  the  litigation  over  disputed  claims,  constituted 
the  principal  work  of  the  remaining  years  of  Mr.  Eckels'  term. 
Confidence  in  the  banks  and  the  banking  situation,  however,  was 
soon  restored.  Deposits,  which  declined  from  $1,764,456,177  on 
December  9,  1892,  to  $1,451,124,330,  had  again  increased  to 
$1,728,418,819  by  October  2,  1894,  or  within  about  $36,000,000 
of  the  highest  figure  attained  in  1892.  Owing  to  the  business 
depression,  there  was  a  decided  check  upon  the  organization  of 
new  national  associations.  During  the  year  following  the  panic 


paragraph  was  written  before  Mr.  Crissing-er  assumed  charge 
of  the  bureau  and  ruled,  in  substance,  that  while  branch  banks  were  not 
authorized  by  law  it  is  permissible  for  a  national  bank  to  have  one  or 
more  agencies  in  the  same  city  or  town  in  which  it  is  located,  with  the 
approval  of  the  Comptroller. 


ROMANCE  AND  TRAGEDY  OF  BANKING  207 

only  fifty  national  banks  were  organized,  with  an  aggregate  capi- 
tal of  $5,285,000,  or  an  average  capital  of  $105,700  each.  This 
was  the  smallest  number  of  new  organizations  and  the  minimum 
amount  of  capital  authorized  in  any  year  since  1879.  The  net 
earnings  of  the  banks  were  also  the  lowest  recorded  in  the  history 
of  the  system,  with  the  exception  of  those  for  the  years  1878  and 
1879.  The  average  dividends  paid  were  only  five  per  cent.  Many 
banks  were  compelled  to  go  into  voluntary  liquidation  or  reduce 
their  capital  stock  in  proportion  to  their  deposits  and  to  provide 
for  losses  which  impaired  their  capital,  in  lieu  of  an  assessment 
upon  the  stockholders  to  make  good  the  deficiency.  The  unpar- 
alleled severity  of  the  panic  caused  an  appalling  shrinkage  in 
values  of  nearly  every  kind  and  character.  The  depreciation  of 
securities  usually  dealt  in  on  stock  exchanges  was  so  great  as  to 
make  them  unmarketable.  Commercial  houses,  manufacturing 
establishments,  railroads  and  factories,  all  were  affected  alike  by 
the  depression  and  numerous  business  failures  and  enforced  idle- 
ness was  the  result.  The  return  of  deposits  to  the  banks  had  the 
effect  of  accumulating  large  amounts  of  money  at  the  principal 
financial  centers  and  cash  reserves  were  piled  up  with  compara- 
tively little  expansion  of  loans.  Out  of  a  list  of  two  hundred  and 
twenty-seven  securities  dealt  in  on  the  New  York  Stock  Exchange 
only  nine  showed  an  advance  during  the  year,  and  a  conservative 
estimate  of  the  shrinkage  in  value  of  twenty-five  speculative  stocks 
amounted  to  $235,000,000.  The  mercantile  and  bank  failures 
during  the  year  were  estimated  to  number  about  seventeen 
thousand. 

Under  such  a  condition  of  affairs,  the  difficulties  attending  the 
liquidation  of  failed  banks  can  readily  be  imagined.  Notwith- 
standing this  fact,  Mr.  Eckels  devoted  his  energies  during  the 
remainder  of  his  term  to  the  liquidation  of  the  failed  institutions 
as  expeditiously  as  possible  consistent  with  the  best  interests  of 
the  trusts,  and  at  the  close  of  his  term  thirty-two  out  of  the  one 
hundred  and  eighty-one  banks  that  were  placed  in  the  hands  of 
receivers  during  his  administration  were  finally  closed,  and  a  con- 
siderable number  of  the  remainder  had  paid  several  dividends 
each  to  their  depositors.  The  dividends  paid  in  1893  amounted 
to  the  sum  of  $3,433,646;  in  1894  to  $5,124,577;  in  1895  to 


208  ROMANCE  AND  TRAGEDY  OF  BANKING 

$3,380,552;  in  1896  to  $2,451,959,  and  in  1897  to  $13,169,781, 
making  a  total  of  dividends  paid  within  the  five  years  from  1893 
to  1897  of  $27,560,515,  or  thirty-six  and  a  quarter  per  cent,  of 
all  the  dividends  paid  to  creditors  of  insolvent  national  banks 
from  1863  to  1897. 

During  the  thirty-four  years  covered  by  the  period  indicated, 
a  total  of  $75,935,925  had  been  paid  in  dividends  to  creditors  of 
the  three  hundred  and  sixty-eight  banks  that  had  been  placed  in 
the  hands  of  receivers,  and  $13,169,781,  or  seventeen  and  one- 
third  per  cent,  of  this  amount,  was  paid  in  1897,  the  last  year  of 
Mr.  Eckels'  term.  Seventeen  additional  dividends  were  ordered, 
amounting  to  $625,000,  but  had  not  been  paid  at  the  close  of  the 
Comptroller's  report  year  of  October  31,  1897. 

The  National  Bank  of  Kansas  City,  Mo. 

The  National  Bank  of  Kansas  City,  Mo.,  was  organized  April 
13,  1886,  with  a  capital  stock  of  $1,000,000.  It  suspended  tem- 
porarily during  the  panic  of  1893,  but  resumed  business  Octo- 
ber 9  of  that  year,  after  the  payment  of  an  assessment  upon  the 
stockholders  of  thirty  per  cent,  and  entering  into  an  agreement 
with  its  creditors  for  an  extension  of  their  claims  for  periods 
ranging  from  three  to  twelve  months.  About  ninety  per  cent,  of 
the  claims  of  depositors  and  other  creditors  were  extended  under 
this  agreement. 

After  the  bank  resumed  business,  a  large  number  of  the  depos- 
itors being  in  need  of  money,  borrowed  from  other  banks  by  hy- 
pothecating their  extension  certificates  as  security  for  their  loans. 
These  certificates  were  presented  promptly  for  payment  at  the 
date  of  maturity  by  the  banks  holding  them,  and  the  National 
Bank  of  Kansas  City  was  obliged  to  pay  them  on  demand,  as  no 
further  negotiations  could  be  effected  with  the  depositors  who 
transferred  their  claims.  This  condition  created  a  constant 
demand  upon  the  cash  resources  of  the  bank  from  the  date  of  the 
first  maturity  of  these  certificates  up  to  near  the  time  of  the  sec- 
ond closing  of  the  bank. 

While  the  bank  at  the  date  of  resumption  of  business  appeared 
to  have  ample  cash  resources  to  meet  all  demands  that  were  likely 


ROMANCE  AND  TRAGEDY  OF  BANKING  209 

to  be  made,  the  managers  did  not  anticipate  the  hypothecation  of 
such  a  large  amount  of  the  extension  certificates  and  the  demand 
for  their  payment  as  they  matured.  These  demands  soon  ab- 
sorbed all  of  the  available  cash  of  the  bank,  and  while  collections 
were  made  from  the  assets  to  a  certain  degree,  they  did  not  keep 
pace  with  the  constant  shrinkage  in  deposits.  In  addition  to  this, 
the  continued  business  depression  throughout  that  section  of  the 
country  operated  to  further  reduce  individual  balances,  the  de- 
positors being  unable  to  maintain  their  deposits,  as  they  would 
no  doubt  have  done  under  more  favorable  or  normal  business  and 
financial  conditions.  The  withdrawal  of  deposits  did  not  seem  to 
be  so  much  from  want  of  confidence  in  the  management  of  the 
bank  as  from  the  necessities  of  the  depositors,  and  the  holders  of 
the  extension  certificates  could  not,  of  course,  be  expected  to  per- 
mit the  deposits  to  remain  in  the  bank,  but  demanded  payment  at 
maturity. 

In  the  course  of  twelve  or  fifteen  months  it  became  apparent 
that  the  bank  was  not  gaining  in  resources,  but  on  the  contrary 
its  cash  availables  were  being  constantly  reduced.  This  fact  was 
noticed  by  the  depositors  and  the  business  public  and  naturally 
excited  remark  and  distrust,  which  had  the  effect  of  causing  quiet 
but  steady  withdrawals  of  balances.  The  last  published  state- 
ment of  the  bank  made  such  an  unfavorable  showing  in  this 
respect  as  to  produce  a  slight  run,  which  resulted  in  the  with- 
drawal during  the  one  week  immediately  previous  to  suspension 
of  $126,000. 

The  bank  also  had  a  large  amount  of  paper  based  upon  real 
estate  security,  the  greater  part  of  which,  while  ultimately  good, 
was  not  immediately  convertible. 

When  this  condition  of  affairs  became  known  to  the  examiner 
he  made  an  examination  of  the  bank  and  satisfied  himself  that 
unless  some  assistance  was  received  from  the  Clearing  House  Asso- 
ciation suspension  was  inevitable.  Negotiations  were  under  wa}' 
at  this  time  to  sell  the  institution  to  one  of  the  other  banks  in 
Kansas  City,  but  nothing  was  accomplished  in  that  direction,  and 
when  efforts  to  obtain  assistance  from  the  Clearing  House  Asso- 
ciation failed,  the  examiner  concluded  that  the  interests  of  the 
depositors  and  the  public  would  be  best  subserved  by  closing  and 


210          ROMANCE  AND  TRAGEDY  OP  BANKING 

taking  possession  of  the  association.  This  course  was  justified 
by  subsequent  discoveries.  Upon  taking  possesion  of  the  institu- 
tion the  examiner  found  in  the  bank's  mail  a  demand  from  a  cor- 
respondent bank  for  the  immediate  remittance  of  $30,000  in  cash, 
and  in  addition,  the  bank  was  found  to  be  a  debtor  to  the  Clear- 
ing House  Association  in  the  sum  of  $25,000,  demand  for  which 
would  have  been  made  had  the  bank  opened  for  business  on  Mon- 
day morning. 

The  failure  of  this  institution  was  due  principally  to  a  depre- 
ciation of  securities  and  the  general  stagnation  in  business  that 
prevailed  at  that  time.  The  total  assets  of  the  association  at  the 
time  of  failure  amounted  to  $2,449,033.  An  assessment  was  levied 
upon  the  stockholders  by  the  Comptroller  to  pay  the  claims  of 
creditors,  but  only  $196,535  of  the  $230,000  assessed  was  col- 
lected, while  the  total  collections  from  all  sources  amounted  to 
only  $1,400,874.  Several  dividends,  aggregating  78.54  per  cent., 
or  $947,455,  were  paid  depositors  and  other  creditors,  and  the 
trust  was  finally  closed  July  1,  1908. 

Failure  of  the  National  Bank  of  Illinois 

The  National  Bank  of  Illinois  at  Chicago  was  organized 
August  29,  1871,  and  was  placed  in  the  hands  of  a  receiver 
December  21,  1896,  after  having  passed  successfully  through  the 
great  Chicago  fire  and  the  financial  panics  of  1873,  1877  and 
1893.  In  volume  of  assets  and  liabilities  this  failure  was  the  larg- 
est at  that  time  of  any  in  the  history  of  the  national  banking 
system. 

The  suspension  of  this  institution  was  due  to  recklessness, 
speculative  and  dishonest  methods  in  banking,  and  inattention  on 
the  part  of  the  directors  to  the  bank's  affairs.  At  the  date  of 
failure  of  this  association  it  had  an  authorized  capital  of 
$1 ,000,000,  a  reported  surplus  of  the  same  amount,  and  undivided 
profits  of  $315,212.  The  total  assets  of  the  bank  aggregated 
nearly  $22,000,000,  and  the  liabilities  to  depositors  and  other 
creditors,  exclusive  of  stockholders,  exceeded  $12,000,000. 

The  president  of  this  association  was  one  of  Chicago's  leading 
German  citizens.  He  was  connected  with  many  social,  political 


ROMANCE  AND  TRAGEDY  OF  BANKING  211 

and  business  societies  and  organizations  and  through  such  con- 
nection secured  for  the  bank  many  deposits  of  city  and  county 
funds  and  of  clubs  and  society  organizations. 

The  principal  cause  of  failure  of  the  bank  was  the  large  arid 
unlawful  loans  to  the  Columet  Electric  Street  Railway,  which 
aggregated  nearly  $2,500,000,  and  in  addition  thereto  about 
$500,000  to  sundry  contractors  interested  in  elevated  railroad 
building.  A  large  amount  of  the  loans  to  the  Calumet  Electric 
Company  did  not  appear  on  the  books  of  the  bank  as  the  liabilities 
of  this  concern,  but  were  concealed  in  other  accounts  for  the  pur- 
pose of  deceiving  the  bank  examiner  and  the  Comptroller. 

This  electric  railroad  had  a  short  time  previously  made  im- 
portant extensions  and  development  of  its  line.  The  company 
had  about  seventy-five  miles  of  road  running  through  a  territory 
which  at  that  time  was  sparsely  settled  and  only  beginning  to 
develop,  and  the  earnings  of  the  company  were  naturally  insuf- 
ficient to  pay  its  operating  expenses.  The  company  needed  financ- 
ing and  the  bank  furnished  the  funds.  Its  outstanding  bonds 
amounted  to  about  $2,500,000,  and  these  were  made  the  basis  of 
the  loans  by  the  bank. 

When  the  bank  was  found  by  the  examiner  to  be  in  a  precari- 
ous condition  the  Clearing  House  Association  of  Chicago  was 
appealed  to  for  assistance,  but  after  a  searching  investigation 
by  a  committee  of  that  association,  instead  of  coming  to  the  relief 
of  the  bank,  adopted  a  resolution  suspending  the  bank  from 
Clearing  House  privileges,  because  of  the  large  unwarrantable 
and  injudicious  loans  made  to  the  Calumet  Company  and  others, 
which,  it  was  publicly  announced  by  the  committee,  seriously 
impaired,  if  it  did  not  entirely  absorb,  the  capital  and  surplus 
of  the  bank.  The  committee,  however,  expressed  the  opinion  that 
the  assets  of  the  bank  were  considered  ample  collateral  for  loans 
at  seventy-five  per  centum  of  their  face  value,  and  in  order  to 
afford  depositors  speedy  relief  the  Clearing  House  banks  agreed 
to  advance  that  amount  upon  all  claims  of  creditors  of  the  asso- 
ciation approved  by  the  receiver. 

Considerable  surprise  was  expressed  at  the  timo  that  the 
Clearing  House  Committee  should  have  let  the  bank  suspend 
rather  than  assist  it  to  liquidate,  but  the  committee  found  the 


212  ROMANCE  AND  TRAGEDY  OF  BANKING 

condition  of  affairs  to  be  such  that   heroic  action  was  deemed 
necessary. 

After  the  suspension  of  the  bank  it  was  found  that  the  funds 
of  the  association  had  been  freely  used  for  years  to  bolster  up 
the  far-reaching  speculations  of  the  second  vice-president,  who 
was  its  chief  executive  officer.  It  was  charged  that  he  was  princi- 
pally instrumental  in  wrecking  the  institution.  He  commenced 
his  career  in  the  bank  at  the  time  of  its  organization  in  the  capac- 
ity of  a  clerk.  He  gradually  rose  from  this  position  to  that  of 
teller,  later  became  cashier,  and  finally  second  vice-president  and 
chief  executive  officer  and  the  master  mind  of  the  institution.  He 
had  the  reputation  of  being  industrious,  shrewd,  careful,  and  of 
good  business  judgment,  saved  his  earnings  and  invested  them 
wisely.  He  then  appears  to  have  spread  out  in  speculative  invest- 
ments, promotion  schemes  in  mining  and  railroads,  and  various 
other  enterprises  that  required  large  capital.  The  president  of 
the  bank  had  grown  old  and  could  no  longer  give  the  affairs  of 
the  institution  the  attention  that  he  gave  them  in  his  younger 
days.  In  consequence  the  active  control  passed  into  the  hands 
of  the  vice-president,  which  gave  him  an  opportunity  to  carry  out 
his  schemes  with  no  one  to  interfere  with  him,  except  the  directors, 
who  apparently  left  the  sole  management  in  his  charge.  After 
staking  his  private  fortune  in  his  investments,  and  additional 
capital  being  required,  the  funds  of  the  bank  were  used  to  further 
his  ventures,  and,  to  conceal  his  unlawful  loans,  false  entries  in 
the  books  were  resorted  to.  The  bank  did  a  large  foreign  ex- 
change business,  and  this  account  was  manipulated  to  cover  over- 
drafts and  conceal  from  the  board  of  directors  and  the  examiner 
the  magnitude  of  the  principal  loans.  So  completely  were  the 
books  of  the  bank  and  its  published  statements  juggled  that  the 
receiver  was  compelled  to  go  back  to  the  beginning  of  every  large 
account  and  trace  down  each  item  in  order  to  arrive  at  a  correct 
understanding  of  the  amount  of  the  liability. 

On  January  1,  1897,  this  vice-president  disappeared  in  the 
dead  of  night  from  his  home  in  Evanston,  111.,  and  at  noon  on  the 
following  day  his  lifeless  body  was  discovered  floating  in  the  lake 
near  Evanston.  He  was  driven  to  suicide  by  the  responsibility 


ROMANCE  AND  TRAGEDY  OF  BANKING  213 

resting  upon  him  for  having  wrecked  the  bank  and  the  fear  of 
criminal  prosecution. 

In  the  liquidation  of  the  trust  the  losses  on  assets  compounded 
or  sold  by  the  receiver  under  order  of  the  court,  amounted  to 
$7,132,812.  An  assessment  of  100  per  cent.,  or  $1,000,000,  was 
levied  by  the  Comptroller  upon  the  shareholders,  of  which  amount 
$848,508  was  collected,  while  the  collections  from  all  sources 
aggregated  $14,233,221.  Dividends  amounting  to  100  per  cent, 
of  the  proved  claims,  or  $11,932,745,  were  paid,  with  interest  of 
16.30  per  cent.  The  Columet  Electric  Railway  was  sold  early  in 
1906,  for  the  sum  of  $3,150,000,  including  the  remaining  assets 
of  the  bank,  and  the  receivership  was  finally  closed  September  30, 
1906. 


Many  amendments  to  the  banking  laws  were  recommended  by 
Mr.  Eckels  in  his  five  annual  reports  to  Congress,  some  of  which 
have  since  been  adopted.  Such  as  have  not  been  enacted  into  law 
are  the  following: 

1.  That  the  Comptroller,  with  the  approval  of  the  Secretary 
of  the  Treasury,  be  empowered  to  remove  officers  and  directors 
of  a  bank  for  violations  of  law,  after  due  hearing. 

2.  For  the  appointment  of  two  supervisory  examiners  at  Gov- 
ernment expense,  to  assist  and  supervise  the  examiners  in  the  field 
and  secure  uniformity  and  greater  efficiency  in  their  work. 

3.  That  upon  one  day  in  each  year,  to  be  designated  by  the 
Comptroller,  the  directors  of  every  national  bank  be  required  to 
make  a  special  examination  of  its  affairs  and  submit  to  the  Comp- 
troller a  report  of  such  examination  upon  blanks  furnished  by 
him  for  that  purpose. 

In  support  of  this  last  recommendation,  Mr.  Eckels  expressed 
the  belief  that  such  an  examination  would  lead  to  better  banking 
methods,  greater  carefulness  in  making  loans,  and  less  liability 
of  concealment  of  long-continued  dishonesty  on  the  part  of  officers 
and  employees. 

In  order  to  guarantee  the  note-holder  against  loss  on  circu- 
lation of  an  insolvent  bank,  he  suggested  the  creation  of  a  safety 


214  ROMANCE  AND  TRAGEDY  OF  BANKING 

fund  to  be  provided  by  a  graduated  tax  of  not  less  than  five  per 
cent,  of  the  total  outstanding  circulation. 

In  his  annual  report  for  1894,  Mr.  Eckels  presents  his  views 
at  length  in  regard  to  the  necessity  for  a  change  from  a  bond  to  a 
safety  fund  security  as  a  basis  for  national  bank  circulation,  as 
the  only  means  of  injecting  elasticity  into  such  issues. 

He  did  not  in  his  reports  undertake  to  outline  the  details  of 
any  plan  for  effecting  a  change  in  the  basis  of  security  for  bank- 
note issues  and  redemptions,  but  suggested  the  appointment  of  a 
non-partisan  commission,  composed  of  men  of  eminent  ability  to 
carefully  investigate  and  study  the  whole  subject  and  devise  a 
currency  system  which  would  commend  itself  to  every  business 
interest  of  the  country. 

In  later  years,  by  authority  of  Congress,  the  National  Mone- 
tary Commission  was  appointed,  which  collected  and  collated  in- 
formation and  statistics  relating  to  banking  and  currency  from 
every  quarter  of  the  globe,  regardless  of  time,  labor  or  expense. 
This  feature  of  Mr.  Eckels'  recommendation  was  fully  and  exhaus- 
tively carried  out,  but  the  activities  of  the  commission  did  not 
result  in  the  fulfillment  of  his  dream,  as  expressed  in  his  recom- 
mendation, that  such  a  commission  could  unquestionably  "devise 
a  currency  system  sound  in  every  part  and  one  which  would  com- 
mend itself  to  every  business  interest  of  the  country."  The  vast 
amount  of  valuable  information  collected  and  prepared  by  the 
National  Monetary  Commission  was  of  great  aid  and  value  to  the 
f  ramers  of  the  Federal  Reserve  Act  and  was  largely  used  by  them 
as  the  basis  of  that  legislation. 


CHARLES  G.  DA  WES 
Comptroller  of  the  Currency,  1898-1901 


CHAPTER  XII 

Charles  G.  Dawes 

CHARLES  G.  DAWES,  of  Illinois,  the  tenth  Comptroller  of 
the  Currency,  was  appointed  to  succeed  Mr.  Eckels  Janu- 
ary 1,  1898,  and  continued  in  office  until  September  30, 
1901. 

Mr.  Dawes  was  born  at  Marietta,  Ohio,  August  27,  1865.  He 
attended  the  public  schools  of  his  native  city  and  was  graduated 
at  Marietta  College  with  honors  in  1884.  He  was  only  thirty- 
three  years  of  age  at  the  time  of  his  appointment  as  Comptroller, 
and,  like  his  immediate  predecessor,  never  had  had  any  banking 
experience,  although  he  was  a  student  of  finance  and  in  1884 
wrote  and  published  a  book  entitled  "The  Banking  System  of  the 
United  States."  His  appointment  as  Comptroller  and  his  suc- 
cessful administration  of  the  office  was  a  further  demonstration 
of  the  fact  that  a  man  of  good  business  judgment  and  discretion 
is  as  well  qualified  and  capable  of  filling  the  position  satisfactorily 
as  a  trained  banker. 

After  leaving  college,  he  attended  the  Cincinnati  Law  School, 
from  which  he  was  graduated  in  1886.  After  graduation  he  was 
engaged  for  a  time  in  civil  engineering  and  became  Chief  Engineer 
of  a  railroad  which  now  constitutes  a  portion  of  the  Toledo  and 
Ohio  Line. 

In  1887  he  removed  from  Marietta,  Ohio,  to  Lincoln,  Neb., 
where  for  seven  years  he  practiced  law  and  successfully  engaged 
in  business  under  the  firm  name  of  Dawes,  Cunningham  &  Coff- 
roth.  While  living  in  Nebraska  he  took  an  active  part  in  public 
affairs,  and  about  the  time  of  the  enactment  of  the  Interstate 
Commerce  Law  was  a  recognized  leader  in  the  discussions  of  the 
freight  rate  schedules  of  Nebraska. 

Mr.  Dawes  was  a  very  close  friend  of  President  McKinley, 
socially  and  politically,  and  was  the  executive  head  of  the  Mc- 
Kinley movement  which  resulted  in  the  Illinois  delegation  being 
instructed  for  McKinley  at  the  Springfield  Convention  in  1896. 

216 


216  ROMANCE  AND  TRAGEDY  OF  BANKING 

He  was  the  representative  from  Illinois  on  the  Executive  Com- 
mittee of  the  Republican  National  Committee  in  the  campaign 
of  that  year,  and  took  an  active  part  in  the  election  of  Mr.  Mc- 
Kinley  to  the  Presidency. 

After  several  years'  residence  in  Nebraska,  Mr.  Dawes  re- 
turned to  Illinois  and  became  interested  in  the  gas  business  at 
Evanston,  where  he  has  since  resided,  with  the  exception  of  the 
time  that  he  lived  in  Washington.  He  resigned  the  office  of  Comp- 
troller on  September  30,  1901,  for  the  purpose  of  making  an 
active  canvass  for  the  position  of  United  States  Senator  from 
Illinois,  but  the  untimely  death  of  President  McKinley  interfered 
with  his  plans  in  this  respect  and  led  to  the  abandonment  of  his 
aspirations  in  that  direction. 

In  1892  he  organized  the  Central  Trust  Company  of  Illinois 
at  Chicago,  of  which  he  was  its  first  president.  This  company 
started  with  a  capital  stock  of  $2,000,000,  which  was  subse- 
quently increased  by  the  absorption  of  other  banking  institutions 
to  $4,500,000,  with  surplus  and  profits  of  nearly  $2,000,000, 
and  deposits  of  all  kinds  of  over  $43,000,000.  It  has  been  a  very 
successful  banking  institution  from  the  time  it  commenced 
business. 

When  the  United  States  became  involved  in  the  World  War 
with  Germany,  Mr.  Dawes  promptly  volunteered  his  services  and 
was  commissioned  a  lieutenant-colonel  of  engineers,  leaving  imme- 
diately for  France  to  join  the  forces  of  General  Pershing.  He 
was  shortly  thereafter  promoted  to  the  rank  of  brigadier-general 
of  engineers  and  was  made  Chief  of  the  United  States  Purchasing 
Board  in  charge  of  the  procurement  of  supplies  for  the  American 
Army  in  Europe  and  a  representative  of  the  American  Army  on 
the  Military  Co-ordinating  Board  for  supply  activities  of  the 
Allied  Armies.  He  rendered  invaluable  services  to  his  country 
and  to  the  allied  armies  in  this  connection,  in  recognition  of  which 
the  French  War  Cross  was  personally  conferred  upon  him  by 
General  Foch. 

When  the  Act  of  June  10,  1922,  was  approved,  providing  for 
a  budget  and  an  independent  audit  of  Government  accounts,  Pres- 
ident Harding  selected  Mr.  Dawes  to  inaugurate  the  budget  sys- 
tem and  appointed  him  "Director  of  the  Bureau  of  the  Budget". 


217 

Mr.  Dawes  assumed  office  on  June  23,  1921,  and  under  his 
immediate  and  energetic  supervision  the  new  bureau  was  estab- 
lished and  the  system  successfully  and  promptly  put  into 
operation. 

After  establishing  the  bureau  on  a  proper  basis  and  placing 
everything  in  satisfactory  working  order,  Mr.  Dawes  resigned  and 
on  July  1,  1922,  returned  to  Chicago  to  resume  the  banking  busi- 
ness in  which  he  was  engaged  at  the  time  he  entered  the  military 
service  of  the  Government  for  the  war  in  Europe. 

Mr.  Dawes  is  the  son  of  General  Rufus  R.  Dawes,  of  Marietta, 
Ohio,  a  veteran  of  the  Civil  War,  and  one  of  the  commanders  of 
the  famous  old  Iron  Brigade  of  Wisconsin.  At  one  time  he  served 
as  a  Representative  in  Congress  from  Ohio. 

Charles  G.  Dawes  inherited  great  regard  for  old  soldiers 
and  no  man  in  public  life  in  Washington  had  a  greater  respect 
for  an  old  veteran  of  the  Civil  War  or  was  ever  more  ready  to 
extend  to  him  sympathy  and  a  helping  hand  than  Charles  G. 
Dawes. 

This  fact  brings  to  mind  an  incident  in  the  lives  of  two  old 
veterans  who  were  employed  as  messengers  in  the  Currency 
Bureau  while  Mr.  Dawes  was  Comptroller.  One  had  served  in 
the  Union  Army  and  the  other  in  the  Confederate  service.  On 
one  occasion  during  the  Civil  War  a  dance  was  being  held  in  a 
house  in  Virginia  near  where  a  force  of  Union  soldiers  were  en- 
camped. Information  was  received  at  the  Union  camp  that  a 
number  of  Confederate  soldiers  were  attending  this  dance  and  a 
non-commissioned  officer  with  a  squad  of  men  was  detailed  to  cap- 
ture them.  They  proceeded  to  the  place,  surrounded  the  house 
and  demanded  the  surrender  of  the  soldiers  present.  One  of  them 
was  one  of  the  messengers  referred  to,  who  attempted  to  escape 
by  way  of  a  window  on  the  second  floor,  but  was  captured  by  the 
other  messenger,  who  was  in  command  of  the  squad,  and  marched 
to  camp  as  a  prisoner.  After  separating  they  did  not  meet  again 
until  chance  brought  them  together  in  the  civil  service  of  the 
Government  as  employees  of  the  Comptroller's  office.  In  discuss- 
ing the  incidents  of  the  war  with  each  other,  the  ex-Confederate 
related  the  story  of  his  capture  at  the  dance  and  then  learned  for 
the  first  time  that  his  fellow-messenger  was  his  captor.  These 


218  ROMANCE  AND  TRAGEDY  OF  BANKING 

two  men  became  fast  friends  from  that  time  and  any  day  they 
could  be  seen  during  the  lunch  hour  smoking  their  pipes  of  peace 
and  relating  incidents  and  their  experiences  during  war  days. 
Both  have  passed  away  and  have  joined  the  great  army  of  their 
comrades  who  preceded  them,  having  died  within  a  few  months  of 
each  other.  One  of  them  was  absolutely  worthless  and  unreliable, 
and  several  attempts  were  made  to  have  him  transferred  out  of 
the  bureau,  but  Mr.  Dawes  would  not  permit  this  to  be  done  while 
he  was  Comptroller. 

A  similar  instance  may  be  related  of  another  old  veteran  of 
the  Civil  War  who  was  employed  as  a  messenger  in  the  Currency 
Bureau  when  Mr.  Dawes  was  Comptroller.  He  had  been  a  brave 
soldier  and  bore  the  evidence  of  several  wounds  received  in  battle. 

This  man  was  a  college  graduate,  highly  educated,  and  a  law- 
yer. He  had  seen  better  days,  and  at  one  time  represented  the 
United  States  Government  in  an  important  consular  position 
abroad.  He  was  a  good  conversationalist,  well  informed,  and  a 
fluent  public  speaker,  but  as  he  advanced  in  years  he  became 
reduced  in  circumstances  until  he  was  obliged  to  accept  a  posi- 
tion as  messenger  in  the  Treasury  Department  and  was  assigned 
to  the  Currency  Bureau  for  duty.  He  was  wholly  unreliable, 
untrustworthy  and  perfectly  useless  as  a  messenger,  or  for  any 
clerical  service.  Whenever  the  chief  of  his  division  complained 
to  the  Comptroller  of  his  negligence  or  absence  from  duty  he 
would  invariably  defend  himself  with  such  skill  and  plausibility 
as  to  be  wholly  exonerated  from  blame  or  any  intentional  wrong- 
doing, and  escape  reprimanding.  He  borrowed  money  from 
everybody  who  would  lend  him  a  dollar,  with  no  ability  or  inten- 
tion of  paying  the  loan.  On  one  occasion  he  borrowed  ten  dollars 
from  the  chief  of  his  division  and  offered  him  as  security  for  the 
loan  two  handsomely  bound  volumes  of  classic  literature  worth 
many  times  the  amount  of  the  loan.  His  chief  took  these  volumes 
and  put  them  away  in  the  drawer  of  his  office  desk.  Several  days 
later,  when  the  chief  was  absent  from  the  office,  this  messenger 
stole  the  books  and  pawned  them  to  secure  another  loan.  He 
had  a  great  fondness  for  books  and  subscribed  for  the  latest  and 
best  publications,  obtaining  them  by  the  payment  of  a  small  sum 
on  the  installment  plan.  He  would  then  pawn  the  books  for  a 


ROMANCE  AND  TRAGEDY  OF  BANKING  219 

loan  considerably  in  excess  of  the  amount  of  the  payment. 
Finally,  the  claims  of  his  creditors  in  and  out  of  the  Treasury 
Department  became  so  numerous  and  annoying  that  the  chief 
clerk  of  the  department  sent  for  him  one  day  to  come  to  his  office 
for  the  purpose  of  asking  for  his  resignation,  but  instead  of  pro- 
curing the  resignation,  before  the  interview  ended,  the  messenger 
succeeded  in  borrowing  ten  dollars  from  the  chief  clerk  by  work- 
ing on  his  sympathies  in  his  usual  manner.  The  chief  clerk  fre- 
quently thereafter  related  this  incident  as  a  joke  upon  himself. 

These  were  some  of  the  unfortunate  types  of  men  whom  Mr. 
Dawes  in  the  kindness  of  his  heart  protected  and  befriended  while 
he  was  in  charge  of  the  Currency  Bureau. 

Liquidation  of  Receiverships 

At  the  date  Mr.  Dawes  assumed  charge  of  the  Currency 
Bureau  there  were  one  hundred  and  twenty-one  banks  in  the  hands 
of  receivers.  All  of  these  receiverships  had  progressed  to  a 
greater  or  less  degree  toward  final  liquidation.  The  cream  of 
the  assets  of  most  of  them  had  been  skimmed  off  by  Mr.  Dawes' 
predecessor  in  his  energetic  efforts  to  finally  close  as  many  of 
them  as  possible  before  retiring  from  office.  Every  asset  that 
could  possibly  be  converted  into  cash  had  been  collected,  com- 
promised or  sold.  In  consequence,  such  of  the  receiverships  as 
Mr.  Dawes  inherited  from  his  predecessor  contained  mostly,  if 
not  wholly,  assets  of  a  slow,  doubtful  or  worthless  character,  a 
considerable  portion  of  which  was  involved  in  litigation. 

Notwithstanding  this  fact,  Mr.  Dawes  set  vigorously  to  work 
to  reduce  the  expenses  of  these  receiverships  and  to  hasten  their 
final  closing.  Receivers'  salaries,  and  the  salaries  of  their  attor- 
neys and  clerks,  were  reduced  to  correspond  with  the  diminished 
assets  consequent  upon  the  progress  made  in  liquidation,  and  also 
by  the  consolidation  of  the  trusts  in  the  hands  of  fewer  receivers. 
As  a  result,  a  saving  of  at  least  one  hundred  thousand  dollars 
was  effected  during  the  first  ten  months  of  Mr.  Dawes'  adminis- 
tration. 

While  the  burden  fell  with  full  force  upon  Mr.  Eckels  to 
bundle  the  unprecedented  number  of  bank  failures  that  occurred 


220  ROMANCE  AND  TRAGEDY  OP  BANKING 

during  his  administration  resulting  from  the  panic  of  1893  and 
to  set  the  machinery  in  motion  to  manage  the  numerous  receiver- 
ships, the  most  difficult  problems  growing  out  of  the  situation 
devolved  upon  Mr.  Dawes  to  solve,  involving  the  handling  and 
disposition  of  almost  every  conceivable  kind  of  property  and 
complications,  and  the  consideration  and  determination  of  the 
most  exacting  and  frequently  perplexing  questions. 

In  furtherance  of  his  policy  of  economy  in  the  administration 
of  receiverships,  Mr.  Dawes  conceived  and  put  in  operation  the 
plan  of  concentrating  in  the  hands  of  one  receiver,  located  in 
Washington,  all  inactive  trusts,  or  such  as  had  been  liquidated  to 
a  point  where  the  remaining  assets  were  of  a  nature  that  required 
nursing  and  would  involve  serious  sacrifice  under  a  forced  sale, 
consisting  principally  of  real  estate  and  claims  in  litigation. 
Nineteen  receiverships  of  this  character  were  removed  to  Wash- 
ington during  the  first  year  of  Mr.  Dawes'  administration,  and 
the  services  of  eighteen  independent  receivers,  together  with  their 
assistants,  clerks  and  office  expenses,  were  dispensed  with. 

Mr.  Dawes  was  led  to  the  adoption  of  this  policy,  as  he  stated 
in  his  first  annual  report,  because  of  the  fact  that  experience  had 
shown  that,  with  some  marked  exceptions,  the  indifference  of 
local  receivers  to  the  business  demands  of  their  trusts  had  a 
tendency  to  grow  as  the  assets  and  their  compensation  diminished. 

The  good  results  attained  from  this  policy  of  consolidation 
so  amply  justified  the  experiment  that  the  practice  has  since 
been  continued  by  his  successors  in  office. 

Second  Assessment  of  Stockholders 

Another  important  change  in  the  interests  of  the  creditors 
of  failed  banks  was  put  in  operation  by  Mr.  Dawes  almost  imme- 
diately after  assuming  charge  of  the  office. 

It  had  been  the  previous  practice  whenever  an  assessment  had 
been  made  upon  the  stockholders  of  a  failed  bank  to  cover  the 
deficiency  in  assets,  to  regard  such  assessment  as  irrevocable  and 
unchangeable,  notwithstanding  the  fact  that  even  though  the 
liquidation  of  the  trust  demonstrated  that  the  estimated  valua- 


ROMANCE  AND  TRAGEDY  OF  BANKING  221 

tion  of  assets  on  which  such  assessment  was  based  was  erroneous 
and  the  deficiency  exceeded  the  amount  estimated. 

Mr.  Dawes  held  that  the  former  position  of  the  office  on  this 
question  was  inconsistent  with  the  exact  fulfillment  of  the  law,  as 
the  stockholders  were  liable  to  the  par  of  their  stockholdings  for 
all  the  debts  of  the  bank,  and  that  such  liability  could  be  enforced 
to  the  extent  of  one  hundred  per  cent,  by  one  assessment  or  by 
as  many  as  were  found  to  be  necessary,  not  exceeding,  however, 
one  hundred  per  cent. 

The  contention  of  Mr.  Dawes  was  so  manifestly  correct  that 
the  wonder  is  that  the  Comptroller's  office  ever  held  a  contrary 
view,  and  his  position  was  subsequently  sustained  by  the  Supreme 
Court  of  the  United  States  in  the  case  of  Studebaker  v.  Perry, 
Receiver,  184  U.  S.  258,  in  which  the  court  held  that  the  Comp- 
troller is  authorized  to  make  a  second  assessment  upon  the  share- 
holders of  an  insolvent  bank  where  the  first  assessment  proves 
insufficient  to  pay  the  debts  of  the  association,  so  long  as  the  total 
assessments  do  not  exceed  the  par  value  of  the  stock. 

National  Bank  Failures  During  Mr.  Dawes'  Administration 

Thirty-four  national  banks  were  placed  in  the  hands  of  re- 
ceivers during  Mr.  Dawes'  administration.  The  most  important 
of  these  failures  were  the  Chestnut  Street  National  Bank  of  Phila- 
delphia, Pa.,  and  the  Globe  National  Bank  of  Boston,  Mass. 

The  Chestnut  Street  National  Bank  was  closed  January  20, 
1898,  twenty  days  after  Mr.  Dawes  assumed  charge  of  the  Comp- 
troller's office,  and  remained  in  the  hands  of  the  bank  examiner 
until  January  29  following,  when  George  H.  Earle,  of  Philadel- 
phia, was  appointed  receiver. 

This  bank  had  a  capital  stock  of  $500,000  and  deposits 
aggregating  $1,700,000.  About  $1,200,000  of  these  deposits 
were  those  of  individuals,  firms  and  corporations  in  Philadelphia, 
and  the  balance  represented  accounts  of  banks  in  other  cities. 
William  M.  Singerly,  the  proprietor  of  The  Record  Publishing 
Company,  was  president  of  this  association,  and  W.  Stcele  was 
its  cashier. 


222          ROMANCE  AND  TRAGEDY  OF  BANKING 

The  president  of  the  bank  owned  twenty-eight  hundred  of  the 
five  thousand  shares  of  the  capital  stock,  and  was  also  the  owner 
of  nearly  all  of  the  capital  stock  of  The  Record  Publishing  Com- 
pany, and  regarded  himself  as  substantially  the  owner  of  the 
latter's  business.  The  company  appeared  to  be  a  paying  and 
prosperous  concern  and  in  no  need  to  borrow  money,  but  Singerly 
as  president  of  the  company  borrowed  from  himself  as  president 
of  the  bank  over  $382,000  on  notes  and  checks  of  the  company, 
and  apparently  without  the  knowledge  or  assent  of  the  directors 
of  the  company,  and  used  the  money  not  for  the  benefit  of  the 
company  but  for  his  own  purposes. 

While  the  bank  was  in  the  hands  of  the  examiner  efforts  were 
made  to  liquidate  it  without  the  intervention  of  a  receiver.  A 
plan  was  devised  to  capitalize  The  Record  Publishing  Com- 
pany at  $4,000,000,  to  be  divided  into  $1,500,000  of  preferred 
stock  and  $2,500,000  of  common  stock.  All  holders  of  the  com- 
pany's bonds  and  stocks  were  to  accept  for  their  claims  a  pro- 
portionate amount  of  the  new  issue  of  stock,  and  after  satisfying 
the  holders  of  mortgages  against  the  company  it  was  calculated 
that  enough  preferred  stock  would  be  left  to  discharge  the  presi- 
dent's indebtedness  to  the  bank.  The  bank  was  to  have  accepted 
stock  for  a  corresponding  amount  of  the  president's  obligations, 
the  value  of  the  stock  to  be  determined  by  the  earning  power  of 
the  company. 

This  plan  contemplated  the  restoration  of  the  bank  to  sol- 
vency, but  because  of  some  dissensions  among  the  creditors  it  was 
not  consummated  and  the  bank  was  finally  placed  in  the  hands  of 
a  receiver,  January  29,  1898,  after  having  been  previously  voted 
into  voluntary  liquidation  by  stockholders  owning  3948  of  its 
shares. 

The  Chestnut  Street  Trust  Company,  an  allied  institution, 
controlled  by  the  same  directors  who  controlled  the  bank,  failed  at 
the  same  time,  also  a  paper  mill  company  controlled  by  President 
Singerly.  The  failure  of  these  three  concerns  was  due  to  a  com- 
mingling of  politics,  the  newspaper  business  and  bank  manage- 
ment. Politics  and  newspaper  management  may  be  made  to  har- 
monize, but  politics,  like  religion,  will  never  blend  with  banking, 


ROMANCE  AND  TRAGEDY  OF  BANKING  223 

and  wherever  it  has  been  tried,  it  has  invariably  failed,  and  in 
most  cases  very  disastrously. 

The  stockholders  of  the  bank  were  assessed  one  hundred  per 
cent,  of  their  stockholdings,  or  $500,000,  of  which  amount  $178,- 
058  was  collected.  The  total  collections  from  all  sources  amounted 
to  $3,296,200.  The  creditors  were  paid  one  hundred  per  cent, 
of  their  claims,  with  interest  at  the  rate  of  six  per  cent,  per  annum 
from  the  date  of  failure,  and  $156,512  was  returned  to  the  share- 
holders. 

The  president  of  the  bank,  who  was  responsible  for  its  failure, 
died  suddenly  February  27,  1898. 

When  the  Chestnut  Street  National  Bank  failed,  its  affairs 
were  found  to  be  so  badly  involved  that  it  was  estimated  that  even 
with  an  assessment  of  one  hundred  per  cent,  on  the  stockholders 
the  assets  would  fall  far  short  of  yielding  sufficient  to  pay  the 
liabilities  to  depositors  and  other  creditors  in  full.  But  Presi- 
dent Singerly,  before  his  death,  was  induced  to  assign  to  the 
receiver  of  the  bank  his  equity  in  a  large  portion  of  the  stock  of 
The  Record  Publishing  Company,  in  the  hope  that  something 
might  be  realized  through  this  source  for  the  unfortunate  cred- 
itors of  the  association.  From  the  date  of  this  assignment  the 
receiver  of  the  bank  and  his  associates  practically  managed  The 
Record  Publishing  Company,  which  was  a  good  paying  property, 
and  as  a  result  of  their  management,  the  securities  of  the  com- 
pany held  by  the  bank  greatly  increased  in  value.  These  securi- 
ties were  sold  by  the  receiver  at  public  auction  on  May  15,  1902, 
for  the  sum  of  $2,874,800,  and  from  the  proceeds  of  this  sale  the 
receiver  of  the  bank  realized  in  full  the  bank's  claim,  amounting 
to  over  $1,190,000. 

That  this  bank  was  able  to  pay  its  creditors  in  full  and  return 
such  a  substantial  sum  to  the  stockholders  was  due  wholly  to  the 
excellent  manner  in  which  the  affairs  of  the  trust  were  adminis- 
tered, and  the  good  management  and  business  judgment  displayed 
by  Comptroller  Dawes  and  the  receiver  in  connection  with  the 
liquidation  of  the  Singerly  indebtedness. 

The  failure  of  the  Chestnut  Street  National  Bank  and  the 
conditions  disclosed  immediately  following  its  suspension  was  the 


224  ROMANCE  AND  TRAGEDY  OF  BANKING 

one  weak  spot  in  Mr.  Eckels'  administration  of  the  Comptroller's 
office. 

This  bank  was  known  to  be  in  a  precarious  condition  for 
months  before  its  failure.  But  Mr.  Eckels'  confidence  in  Mr. 
Singerly's  ability  and  his  promises  to  extricate  the  bank  from  its 
perilous  situation  delayed  the  closing  of  the  institution  until  after 
Mr.  Dawes  assumed  charge  of  the  Comptroller's  office,  when  it 
was  discovered  that  Mr.  Eckels  had  been  grossly  deceived  as  to 
the  true  condition.  The  results  of  the  liquidation,  however,  were 
very  satisfactory  and  gratifying,  and  reflect  great  credit  upon 
Mr.  Dawes  and  the  receiver. 

The  affairs  of  the  Chestnut  Street  Trust  Company,  the  affili- 
ated institution,  were  closed  in  April,  1910,  by  the  payment 
of  a  final  dividend  of  four  per  cent.,  making  the  total  payments 
ninety-one  and  one-half  per  cent. 

Failure  of  the  Globe  National  Bank 

The  Globe  National  Bank  of  Boston,  Mass.,  closed  its  doors 
December  21,  1899,  and  was  placed  in  charge  of  a  national  bank 
examiner  in  the  hope  that  its  affairs  might  be  adjusted  so  as  to 
permit  the  early  resumption  of  business. 

The  bank  had  a  capital  stock  of  $1,000,000  and  individual 
deposits  at  the  date  of  suspension  amounting  to  $5,000,000. 
Charles  H.  Cole  was  president  of  this  institution,  and  Charles  H. 
Hooke,  cashier.  The  failure  was  caused  by  the  misapplication 
of  the  funds  of  the  association  by  the  president  for  his  own  use, 
to  the  extent  of  about  $1,600,000.  Six  hundred  thousand  dollars 
of  this  amount  was  paid  back  in  cash  by  the  president  and  his 
friends  immediately  after  suspension,  and  the  directors  made  good 
the  remainder  by  their  notes  and  securities.  The  troubles  of  the 
bank,  however,  were  greatly  aggravated  by  subsequent  deprecia- 
tion of  stocks  and  bonds  and  by  the  failure  of  a  local  firm  whose 
paper  was  largely  held  by  the  bank.  The  Clearing  House  Asso- 
ciation came  to  the  bank's  aid  in  an  effort  to  relieve  the  situation, 
but  the  general  conditions  at  that  time  were  such  as  to  make  the 
relief  ineffectual  as  to  resumption  of  business  by  the  bank,  and  it 


ROMANCE  AND  TRAGEDY  OF  BANKING  225 

became  necessary  to  appoint  a  receiver  for  the  institution  on 
January  1,  1900. 

An  assessment  of  one  hundred  per  cent,  was  levied  upon  the 
stockholders,  of  which  amount  $979,021  was  collected.  The  total 
collections  from  all  sources  aggregated  $6,994,389.  The  cred- 
itors were  paid  one  hundred  per  cent,  of  their  claims,  with  inter- 
est from  the  date  of  failure,  and  $5651  was  returned  to  the  stock- 
holders. The  receivership  was  finally  closed  February  25,  1903. 

Charles  H.  Cole,  the  president  of  the  bank,  was  indicted  for 
misapplication  of  the  funds  of  the  institution.  He  pleaded  guilty 
and  was  sentenced  to  serve  eight  years  in  jail  at  Greenfield,  Mass. 
He  served  his  full  term,  less  the  usual  allowance  for  good  behavior, 
and  died  a  short  time  after  his  release. 

Defalcations  in  the  First  National  Bank  of  New  York 

In  October,  1900,  a  large  defalcation  was  discovered  in  the 
First  National  Bank  of  New  York  City.  During  the  progress 
of  the  regular  examination  of  this  bank  by  the  national  bank  ex- 
aminer, the  assistant  cashier  discovered  that  C.  L.  Alvord,  the 
note  and  exchange  teller,  was  short  in  his  cash  to  an  amount 
which  later  was  found  to  be  $690,000.  These  thefts  had  been 
going  on  for  a  long  time.  It  was  found  to  have  been  as  much 
as  $200,000  two  years  previous  to  the  discovery  of  the  shortage. 

The  method  of  operation  and  concealment  resorted  to  by  the 
defaulter  was  to  make  the  cash  on  hand  agree  with  the  amount 
for  which  the  teller  was  accountable,  as  shown  by  the  books  of 
the  bank,  by  taking  out  of  the  morning  mail,  of  which  he  had 
charge,  a  sufficient  number  of  cash  items  to  cover  the  aggregate 
amount  of  the  defalcations  and  add  them  to  the  exchanges  for 
the  Clearing  House  received  during  the  preceding  day.  Exami- 
nation of  the  exchanges  by  the  examiner  showed  the  total  amount 
to  be  correct,  but  $690,000  of  the  items  had  been  taken  from  the 
morning's  receipts  and  listed  with  the  previous  day's  exchanges. 
The  amount  of  the  morning  additions  were  reduced  correspond- 
ingly, so  that  the  sum  of  the  two  equalled  the  correct  amount. 

A  thorough  examination  of  the  teller's  accounts  disclosed  that 
his  stealings  covered  a  period  of  several  years.  While  absent  on 


226          ROMANCE  AND  TRAGEDY  OF  BANKING 

a  two  weeks'  vacation  he  took  the  precaution  to  cover  his  short- 
age by  making  a  number  of  charges  to  out-of-town  accounts  and 
credited  the  amount  on  his  return  before  the  monthly  statements 
were  sent  out.  Whenever  he  anticipated  an  examination  of  his 
cash,  or  a  periodical  examination  of  the  bank  by  the  bank  exam- 
iner, he  covered  the  shortage  by  false  charges  against  large 
accounts. 

While  the  bank  examiner  did  not  discover  this  defalcation, 
his  examination  of  the  bank  one  month  earlier  than  the  time  for 
the  regular  examination  prevented  Alvord  from  manipulating  the 
figures  as  he  had  been  in  the  habit  of  doing,  and  a  change  made 
by  him  on  a  slip  of  paper  later  in  the  day  while  the  examination 
was  in  progress  aroused  the  suspicion  of  one  of  the  bank's  officers 
and  caused  an  inquiry  to  be  made  at  the  Clearing  House,  when  it 
was  discovered  that  the  two  items  of  previous  day's  exchanges 
and  the  morning  additions  did  not  correspond  with  the  list  checked 
by  the  examiner.  This  led  to  a  count  of  the  current  day's  cash 
and  the  checks  in  hand,  which  revealed  a  shortage  of  $693,000. 

There  is  no  way  to  accurately  check  the  accounts  of  an  em- 
ployee if  he  has  access  to  the  preceding  day's  cash  from  which  to 
make  good  a  shortage  of  the  current  day,  and  this  fatal  defect 
in  the  system  employed  by  the  First  National  Bank  afforded  the 
opportunity  for  Alvord's  dishonesty  in  the  first  place  and  the 
means  of  successful  concealment  for  a  long  time. 

This  theft  could  probably  have  been  prevented,  and  certainly 
would  have  been  detected  sooner,  by  a  rotation  of  the  clerical 
force  of  the  bank,  thus  placing  each  department  under  super- 
vision of  different  employees  successively. 

Upon  discovery  of  the  shortage,  Alvord  fled  to  Boston,  where 
he  was  arrested  on  October  30,  1900,  and  brought  back  to  New 
York  City.  He  was  tried  and  convicted  in  the  United  States 
Circuit  Court  and  sentenced  to  a  term  of  thirteen  years  in  the 
penitentiary  at  Sing  Sing.  He  was  released  for  good  behavior 
after  serving  eight  years  and  went  to  Stockport,  N.  Y.,  where 
he  lived  until  the  date  of  his  death,  which  occurred  September  10, 
1912. 


ROMANCE  AND  TRAGEDY  OF  BANKING  227 

The  Currency  Laws 

In  his  first  annual  report  to  Congress  Mr.  Dawes  devoted  con- 
siderable space  to  a  discussion  of  the  banking  and  currency  laws 
of  the  United  States,  which,  he  stated,  seemed  to  ignore  the  inter- 
ests of  the  depositors  in  the  banks,  with  whose  protection  the 
Comptroller  was  particularly  charged. 

In  analyzing  the  various  suggestions  for  reforming  the  cur- 
rency laws  that  were  being  advanced  at  that  time,  Mr.  Dawes 
summed  them  up  into  two  main  propositions,  as  follows : 

First.  That  the  disproportion  between  outstanding  currency 
liabilities  of  the  Government,  payable  in  gold,  and  the  gold  held 
for  their  redemption,  should  be  lessened  by  a  contraction  in  the 
amount  of  the  demand  currency  liabilities. 

Second.  That  the  void  in  circulation  that  would  be  caused 
by  such  contraction,  should  be  filled  by  an  extension  of  the  circu- 
lation of  the  national  banks,  which  circulation,  redeemable  in 
gold,  would  ultimately  depend  for  its  chief  security  upon  a  first 
lien  on  the  commercial  assets  of  the  issuing  banks. 

The  more  important  of  these  two  plans,  he  stated,  embodied 
in  the  ablest  forms  the  general  principles  necessarily  involved  in 
a  system  of  banknote  issues,  secured  by  the  general  assets  of  the 
banks,  and  looked  to  the  ultimate  displacement  of  Government 
credit  money  by  a  first  lien  upon  the  assets  of  the  issuing  banks 
and  by  a  five  per  cent,  redemption  fund  created  in  the  first  instance 
by  a  taxation  upon  solvent  issuing  banks  and  thus  maintained. 

In  the  event  of  any  deficiency  occurring  in  such  contributions 
to  the  guaranty  fund,  resort  would  be  had  to  additional  taxation 
upon  the  solvent  banks  issuing  circulation  to  supply  the  defi- 
ciency, such  tax  not  to  exceed  one  per  cent,  on  the  amount  of 
their  note  issue  per  year. 

These  propositions,  Mr.  Dawes  stated,  assumed  that  unless 
there  was  to  be  a  currency  contraction,  some  radical  extension 
of  banknote  issues  was  absolutely  necessary  to  secure  the  proper 
adjustment  of  Government  currency  liabilities  to  the  gold  reserve, 
in  order  to  subserve  the  greater  safety  of  the  gold  standard,  and 
that  through  this  radical  extension  and  change  in  the  form  of 
banknote  issues  alone  was  elasticity  to  be  secured  in  our  currency. 


ROMANCE  AND  TRAGEDY  OF  BANKING 

As  opposed  to  these  propositions,  Mr.  Dawes  contended,  that 
there  existed  no  such  condition  of  finances,  revenues  or  credit  in 
the  United  States  to  justify  the  proposed  shifting  of  the  burden 
of  gold  redemption  of  outstanding  currency  from  the  Govern- 
ment to  the  banks,  or  to  make  necessary  any  radical  changes  or 
concessions  in  the  national  banking  laws  relative  to  note  issues, 
which  would  not  be  considered  wise,  if  the  interests  of  the  com- 
munity, irrespective  of  Government  finances,  were  alone  consid- 
ered. He  expressed  the  view  that  the  resources,  credit  and  finan- 
cial condition  of  the  United  States  were  such  that  by  means  of 
the  revenue  laws  and  other  amendments  suggested  by  President 
McKinley  in  his  message  to  Congress  at  that  time,  a  safer  ratio 
between  outstanding  circulation  and  gold  reserve  be  attained,  the 
stability  of  the  gold  standard  insured,  and  the  currency  main- 
tained upon  a  sound  basis  without  contraction. 

The  most  important  function  of  the  national  banks,  Mr. 
Dawes  held,  was  in  acting  in  the  capacity  of  middleman  between 
the  depositors  and  the  borrowers  of  a  community,  and  that  the 
note-issuing  function  of  the  banks  was  secondary  in  importance 
and  usefulness  under  the  then  or  any  proposed  system  of  bank- 
note issues. 

It  was  especially  important,  therefore,  he  held,  that  in  any 
proposed  changes  in  the  laws  relating  to  the  note-issuing  powers 
of  the  banks,  the  relation  of  the  banks  to  their  depositors  and 
borrowers  should  be  carefully  considered. 

Preferment  of  Note-Holder  to  Depositor 

The  fundamental  basis  of  all  the  currency  reform  plans  that 
were  proposed  while  Mr.  Dawes  was  Comptroller,  contemplated 
making  the  note-holder  a  preferred  creditor  over  the  depositor. 
Mr.  Dawes  held  this  principle  to  be  not  only  inherently  wrong, 
but  unjustifiable  by  any  grounds  of  public  policy,  and  that  the 
practical  effect  of  such  a  measure  upon  the  relation  of  depositors 
to  the  banks  in  the  smaller  communities  of  the  United  States 
would  be  so  revolutionary  as  to  bring  about  the  most  injurious 
conditions  in  the  general  business  of  the  country. 


ROMANCE  AND  TRAGEDY  OF  BANKING  229 

The  Government  was  given  a  first  lien  upon  the  assets  of  a 
bank  for  any  deficiency  between  the  market  value  of  the  bonds 
deposited  to  secure  circulation  and  the  amount  of  the  circulation 
outstanding  against  such  bonds,  but  as  the  circulation  issued 
could  not  exceed  the  par  value  of  the  bonds  deposited  to  secure 
its  redemption,  and  as  the  bonds  were  redeemable  at  par  by  the 
Government,  it  never  was  and  probably  never  would  become 
necessary  for  the  Government  to  resort  to  this  lien  on  the  assets 
of  a  bank  to  redeem  its  circulation,  except  in  the  case  of  a  sale 
of  the  bonds  of  a  failed  bank  at  a  price  below  par.  If  the  bonds 
securing  the  circulation  of  an  active  association  fell  below  par  in 
the  market,  the  law  authorized  the  Comptroller  to  require  an  addi- 
tional deposit  of  bonds  to  cover  the  deficiency,  but  no  additional 
deposit  ever  was  required  when  the  market  price  of  the  bonds  was 
below  par. 

Mr.  Dawes  claimed  that  it  was  as  sound  in  principle  for  a 
bank  to  issue  banknotes  as  to  receive  deposits  when  the  note-holder 
and  the  depositor  stood  upon  the  same  footing  in  relation  to  the 
assets  of  the  bank,  but  it  was  not  as  sound  in  principle  when  in  the 
event  of  insolvency,  the  creditor  who  holds  a  note  of  the  bank 
claims  the  right  to  be  first  paid  in  full  before  the  creditor  who 
claims  as  a  depositor  can  receive  anything. 

Mr.  Dawes  expressed  the  opinion  that  the  preference  of  a  note- 
holder to  the  depositor  could  not  be  justified  upon  any  grounds  of 
public  policy  which  did  not  admit  the  injustice  to  the  depositor 
class  as  an  expedient  necessary  for  the  Government  to  resort  to 
as  a  means  of  securing  additional  and  a  different  kind  of  circula- 
tion than  that  issued  under  the  bond-secured  requirement. 

The  argument  usually  advanced  by  those  who  favored  a  pre- 
ferment of  the  note-holder  to  the  depositor  under  the  various 
plans  presented  for  an  asset  or  credit  currency  in  the  liquidation 
of  the  liabilities  of  national  banks,  was  that  the  depositor  volun- 
tarily selected  the  bank  in  which  to  deposit  his  money,  and  that  it 
is  incumbent  upon  him  to  inform  himself  beforehand  of  the  trust- 
worthiness of  the  institution,  while  the  notes  of  the  bank  arc  issued 
for  general  circulation  and  pass  into  the  hands  of  those  who  have 
no  means  of  knowing  the  condition  or  the  solvency  of  the  associa- 
tion issuing  them. 


230          ROMANCE  AND  TRAGEDY  OF  BANKING 

This  line  of  reasoning  did  not  appeal  to  Mr.  Dawes,  as  com- 
mending itself  to  men  of  practical  views,  and  in  his  report  for 
1898,  he  disputed  the  logic  of  such  an  assumption,  as  follows: 

Experience  demonstrates  that  in  the  banking  business  the 
detection  of  untrustworthiness  in  banks  is,  as  a  matter  of 
fact,  not  one  of  the  duties  with  which  the  depositor,  as  a 
general  rule,  charges  himself.  He  has  come  to  leave  that  to 
the  officials  of  the  National  and  State  Governments;  and 
while  it  may  be  true  that  as  a  class  he  ought  to  exercise 
greater  discretion  in  his  selection  of  banks  for  his  deposit, 
it  is  equally  true  that  as  a  class  he  has  oou^e  to  have  the 
confidence  in  the  system  which  has  made  him  comparatively 
indifferent  under  normal  conditions  to  this  duty. 

Again,  he  is  often  compelled,  by  the  very  nature  of  his 
business,  to  be  dependent  upon  the  agency  of  banks  at  a 
distance  in  handling  his  funds,  in  which  case  he,  like  the 
noteholder,  could  not  investigate  if  he  so  desired. 

Certainly  the  fundamental  right  to  prefer  in  the  distribu- 
tion of  the  assets  of  an  insolvent  bank  the  note-hold  ing- 
class  to  the  depositor  class,  should  rest  upon  some  broader 
ground  than  the  assumed  neglect  of  the  depositor  class  to 
acquaint  itself  with  the  nature  of  the  private  business  and 
internal  management  of  banking  institutions,  whose  proper 
supervision  the  National  Government,  as  the  representative 
of  the  depositors  and  the  public,  has  taken  upon  itself. 

The  lien  given  to  the  note-holder  under  the  present  sys- 
tem, first  upon  the  Government  bonds  deposited  expressly 
in  trust  as  security  for  said  notes,  before  other  assets  of 
the  bank  can  be  reached,  is  far  different  in  practical  effect 
from  the  general  and  unqualified  priority  in  lien  upon  the  as- 
sets of  a  bank  proposed  in  these  plans. 

The  priority  of  lien  of  the  note-holders  under  the  pres- 
ent system  over  the  depositors,  is  first  upon  the  United 
States  bonds  deposited  in  trust  for  their  benefit,  and  only 
secondarily,  in  case  of  deficiency  in  bonded  security,  upon 
the  general  assets  of  the  bank.  In  practical  operation  this 
security  gives  the  notes  the  unquestioned  credit  necessary 
to  enable  them  to  circulate,  and  at  the  same  time  does  not, 
as  a  matter  of  fact,  interfere  with  the  rights  of  the  depositor 
in  case  of  insolvency,  since  the  bonds  at  public  sale  bring 
the  amount  of  the  notes,  and  return  to  the  insolvent  bank 


ROMANCE  AND  TRAGEDY  OF  BANKING  231 

for  the  benefit  of  the  general  creditors   practically  all  the 
equity  originally  invested  in  them. 

This  being  the  practical  effect  of  the  present  bank-note 
system,  it  cannot  rightfully  be  considered  as  justifying 
any  assumption  that  in  its  theory  the  rights  of  noteholders 
are  considered  as  more  sacred  in  themselves,  than  the  rights 
of  depositors. 

Under  the  present  system  the  relation  of  the  note-issues 
of  a  national  bank  to  its  general  business,  is  somewhat  the 
same  as  the  relation  of  the  issue  and  redemption  department 
of  the  Bank  of  England,  to  its  commercial  department.  They 
are  in  reality  almost  entirely  separate,  and  so  intended  to  be. 

If  under  any  new  system,  the  note-holder  and  the  deposit 
holder  come  into  similar  relations  to  the  bank,  their  rights 
against  the  common  assets,  to  which  their  money  has  alike 
contributed,  should  be  equally  sacred. 

If  then,  there  is  no  inherent  moral  right  to  establish  a 
preference  of  the  note  holding  creditors  of  an  insolvent 
bank  as  against  the  deposit  holding  creditors,  in  the  distribu- 
tion of  the  assets  of  an  insolvent  bank,  the  question  arises, 
does  public  opinion  demand,  in  the  interest  of  the  common 
good,  that  such  a  preference  should  be  given  in  order  to 
establish  a  bank-note  system  which  will  give  banks  such  a 
profit,  that  to  secure  it  they  will  relieve  the  United  States 
Treasury  of  the  burden  of  gold  redemption,  and  afford  the 
country  a  circulating  medium  having  alleged  advantage  over 
that  now  in  use. 

In  concluding  the  discussion  of  this  subject,  Mr.  Dawes  sum- 
marized his  views  upon  the  currency  plans  suggested,  as  follows : 

First.  As  a  fundamental  proposition,  any  bank-note 
system  depending  for  security  upon  the  commercial  assets 
of  banks,  and  sanctioned  by  government,  should  be  inher- 
ently fair  in  its  relation  to  the  deposit  holding  creditors 
and  the  note  holding  creditors  of  an  insolvent  bank. 

Second.  No  system  is  inherently  fair  which  creates  a 
preference  of  the  note  holder  over  the  deposit  holder  in  the 
distribution  of  the  assets  of  an  insolvent  bank. 

Third.  In  none  of  the  older  countries,  to  the  success  of 
whose  uncovered  note  systems  we  are  referred  as  tending 
to  justify  the  experiment  in  this  country,  is  the  note-holder 


232  ROMANCE  AND  TRAGEDY  OF  BANKING 

by  the  law  preferred  over  the  deposit  holder,  in  case  of 
insolvency  of  banks  of  issue.  Canada,  with  its  thirty-eight 
central  banks  of  issue,  as  compared  with  thirty-six  hundred 
scattered  national  banks  in  this  country,  furnishes  the  only 
exception  to  this  rule. 

Fourth.  The  necessity  of  the  preference  under  any  such 
system  in  this  country,  to  give  security  and  credit  to  the 
notes,  demonstrates  that  it  is  the  depositors  of  the  country 
and  not  the  banks  upon  whom  the  great  weight  of  the  guar- 
antee of  the  note  issues  must  fall. 

Fifth.  A  fairer  system  would  provide  that,  when  a  re- 
ceiver took  charge  of  an  insolvent  bank,  he  should  not  first 
pay  into  the  general  redemption  fund  held  by  the  Govern- 
ment, an  amount  derived  from  the  assets  of  the  bank  suffi- 
cient to  pay  the  note  holders  in  full  before  paying  anything 
to  depositors,  but  he  should  pay  into  the  fund  that  pro  rata 
share  of  the  proceeds  derived  from  the  assets,  which  should 
go  to  the  note  holders,  not  as  preferred  creditors,  but  as 
creditors  in  the  same  class  as  depositors. 

Sixth.  If  under  such  a  system,  owing  to  causes  to 
which  we  have  referred,  the  tax  upon  the  solvent  banks 
would  be  so  large  as  to  render  the  issue  of  such  currency 
unprofitable  and  unattractive  to  the  banks,  it  would  be 
a  demonstration  of  the  radical  difference  in  the  environ- 
ment and  condition  of  our  banking  system  as  compared  with 
the  more  centralized  and  older  systems  of  Europe.  It 
would  be  a  demonstration  of  the  fact  that,  under  the  pro- 
posed legislation,  while  the  banks  would  take  the  profits 
upon  the  circulation,  the  depositors  would  take  the  bulk  of 
the  losses. 

Seventh.  Such  a  system  of  uncovered  notes  as  this  pro- 
posed, providing  for  a  preference  of  the  note  holders  over 
other  creditors,  would  interfere  radically  with  the  more 
important  functions  of  national  banks,  to  which  the  note- 
issuing  function  is  secondary  and  subordinate. 

Eighth.  The  Government  of  the  United  States  is  not  in 
such  straits,  in  connection  with  its  present  currency  system, 
as  to  compel  it  to  enter  into  a  plan  of  currency  changes, 
by  which  it  in  effect  sells  extended  and  valuable  currency 
privileges  to  the  national  banks  of  the  country,  in  exchange 
for  assistance  from  them  in  meeting  its  present  government- 
al currency  obligations  payable  in  gold. 


ROMANCE  AND  TRAGEDY  OF  BANKING  233 

Ninth.  If  the  present  conditions  of  governmental  cur- 
rency demand  reforms  to  secure  which  will  entail  cost,  it 
is  better  for  the  Government,  as  the  representative  of  all 
the  people,  and  under  all  circumstances  connected  with  our 
banking  system,  to  pay  an  ascertained  and  exact  cost  direct, 
than  to  endeavor  to  evade  it  by  granting  extensive  currency 
privileges  to  banks,  which  of  necessity  must  reimburse  them- 
selves from  the  community  and  the  depositor  class  for  any 
cost  which  they  incur  in  assuming  the  burden  of  gold  re- 
demption, or  maintaining  the  credit  of  their  notes. 


Currency  Legislation  Suggested 

All  writers  on  the  subject  of  our  bond-secured  banknote  cir- 
culation have  agreed  on  this  one  fact,  and  it  is  about  the  only  one 
they  did  agree  upon,  that  the  most  serious  defect  in  the  system 
was  its  inelasticity  and  consequent  inability  to  automatically  ex- 
pand in  times  of  enforced  liquidation  due  to  commercial  and  bank 
panics.  As  a  means  of  correcting  this  defect,  Mr.  Dawes  recom- 
mended the  following  amendments  to  the  laws  governing  the  issue 
of  national  bank  notes : 

First.  The  existing  bank-note  system,  based  upon  de- 
posit of  Government  bonds  as  security,  should  not  now  be 
abandoned. 

Second.  For  the  purpose  of  allowing  elasticity  to  bank- 
note issues  to  protect  the  banks  and  the  community  in  time 
of  panic,  a  small  amount  of  uncovered  notes,  in  addition  to 
the  secured  notes,  should  be  authorized  by  law  under  the 
following  limitations:  They  should  be  subjected  to  so  heavy 
a  tax  that  they  could  not  be  issued  in  normal  times  for  the 
purpose  of  profit,  but  would  be  available  in  times  of 
emergency.  The  tax  should  be  so  large  upon  the  solvent 
issuing  banks  as  to  provide  a  fund  which,  in  connection 
with  the  pro  rata  share  of  the  assets  of  an  insolvent  bank, 
would  be  sufficient  to  redeem  the  notes  in  full,  without  neces- 
sitating any  preference  of  note  holders  over  depositors  of 
any  insolvent  issuing  bank.  The  tax  should  be  so  large  as 
to  force  this  currency  into  retirement  as  soon  as  thr 
emergency  passes. 


234          ROMANCE  AND  TRAGEDY  OF  BANKING 

Such  a  currency  could  be  used  only  to  lessen  the  evil 
effects  of  the  too  rapid  liquidation  of  credits  which  are 
collapsing  under  a  financial  panic,  but  could  not  be  profit- 
ably used  as  a  basis  of  business  speculation  and  inflation. 
It  should  be  to  the  business  community  what  the  clearing 
house  certificates  are  to  our  cities  in  times  of  panic — a 
remedy  for  an  emergency,  not  an  instrument  of  currency 
business. 

The  Act  of  May  30,  1908,  known  as  "The  Emergency  Cur- 
rency Law,"  practically  incorporated  in  its  provisions  the  fore- 
going views  expressed  by  Mr.  Dawes,  by  providing  for  additional 
circulation  at  a  higher  rate  of  taxation,  in  times  of  emergency,  to 
be  issued  through  Currency  Associations  or  by  individual  banks 
upon  the  security  of  their  assets  having  circulation  outstanding 
secured  by  United  States  bonds  of  not  less  than  forty  per  cent,  of 
their  capital  stock. 

Amendments  to  the  Banking  Laws  Recommended  by  Mr.  Dawes 

In  his  annual  reports  to  Congress  Mr.  Dawes  recommended 
the  following  amendments  to  the  banking  laws: 

That  the  limitation  placed  upon  the  liabilities  to  any  associa- 
tion of  any  person,  company,  corporation  or  firm  for  money  bor- 
rowed, shall  not  apply  where  a  loan  in  excess  of  the  prescribed 
limit  shall  be  less  than  two  per  cent,  of  the  total  assets  of  the  bank 
at  the  time  of  making  the  loan,  such  loan  to  be  at  all  times  pro- 
tected by  collateral  security  equal  to  or  greater  in  value  than  the 
excess  in  the  amount  of  the  loan  over  the  limit  at  that  time  based 
upon  the  capital  stock  of  the  bank. 

He  also  recommended  that  a  strict  and  enforcible  penalty  be 
provided  for  infractions  of  this  suggested  amendment,  so  as  to 
enable  the  Comptroller  to  compel  compliance  with  its  terms. 

In  suggesting  this  amendment  Mr.  Dawes  expressed  the  opin- 
ion that  while  it  would  have  the  effect  of  compelling  a  safe  and 
proper  distribution  of  the  loans  of  larger  banks,  it  would  at  the 
same  time  enable  them  to  loan  more  nearly  the  same  per  cent,  of 
their  total  assets,  as  the  law  permitted  the  smaller  banks  to  make 


ROMANCE  AND  TRAGEDY  OF  BANKING  235 

and  to  supply  the  needs  of  borrowers  in  the  larger  communities 
within  the  limitations  of  the  statute. 

He  stated  that  the  size  of  a  loan  is  of  itself  no  indication  of  its 
strength  or  weakness,  if  it  is  not  such  as  to  be  an  undue  concen- 
tration of  the  assets  of  the  institution  in  the  hands  of  one  individ- 
ual or  concern.  He  did  not  regard  it  as  wise  to  deprive  the 
creditors  and  shareholders  of  a  bank  of  the  safety  of  the  law  of 
average,  either  upon  economic  grounds  or  upon  the  grounds  of 
public  policy. 

For  the  purpose  of  illustrating  the  effect  of  the  law  as  it 
existed  in  1908,  limiting  loans  to  ten  per  cent,  of  the  capital  of 
the  bank,  Mr.  Dawes  presented  a  table  in  his  report  for  that  year 
showing  the  average  maximum  loan  to  average  resources  allowed 
under  the  ten  per  cent,  limit  based  upon  capital  stock  to  be  as 
follows : 

New  York  City  banks,  56/100  of  one  per  cent. 
Chicago  banks,  98/100  of  one  per  cent. 
St.  Louis  banks,  1.4  per  cent. 
Reserve  city  banks,  1.51  per  cent. 
Country  banks,  2.14  per  cent. 

Mr.  Dawes  recommended  that  domestic  branch  banks  be 
authorized  to  be  maintained  in  communities  of  less  than  two  thou- 
sand inhabitants,  in  order  to  afford  banking  facilities  in  small 
communities  that  could  not  afford  to  maintain  a  bank  with  a  capi- 
tal of  fifty  thousand  dollars,  the  minimum  capital  then  allowed  by 
law. 

At  the  time  this  recommendation  was  made  the  law  had  not 
been  amended  authorizing  the  establishment  of  national  banks 
with  a  minimum  capital  of  twenty-five  thousand  dollars  in  places 
the  population  of  which  did  not  exceed  three  thousand  people. 

In  his  report  for  1900  Mr.  Dawes  recommended  the  passage 
of  a  bill  introduced  by  Representative  Marriott  Brosius,  chair- 
man of  the  Committee  on  Banking  and  Currency,  in  the  First  Ses- 
sion of  the  Fifty-sixth  Congress,  "For  the  better  control  of  and 
to  promote  the  safety  of  national  banks." 

This  bill  was  designed  to  insure  a  greater  degree  of  safety  in 
loans  to  officers  and  directors  of  the  banks.  It  recognized  the  dis- 


236          ROMANCE  AND  TRAGEDY  OF  BANKING 

tinction  in  the  relations  of  directors  to  a  bank  and  those  sustained 
by  executive  officers  of  the  association,  and  prohibited  any  loan 
being  made  to  the  president,  vice-president,  cashier,  or  any  clerk, 
teller,  bookkeeper  or  other  person  in  the  employ  of  the  bank, 
except  upon  the  previous  approval  of  a  majority  of  the  board  of 
directors  constituting  a  quorum,  or  the  executive  committee  of 
the  board,  and  for  any  violation  of  this  restriction  provided  a  pen- 
alty of  not  more  than  five  thousand  dollars  or  imprisonment  for 
not  more  than  five  years,  or  both. 

It  also  provided  that  the  board  should  fix  by  resolution,  duly 
spread  upon  the  minutes,  the  limit  of  credit  to  be  extended  to  any 
director.  Where  no  such  limit  of  credit  was  fixed  by  the  board, 
no  loan  should  be  made  to  a  director  without  the  previous  ap- 
proval of  the  board  in  the  same  manner  that  loans  were  made  to 
officers  and  employees  of  the  bank.  For  any  violation  of  this  pro- 
vision, a  penalty  was  provided  that  the  association  should  forfeit 
to  the  United  States  a  sum  equal  to  double  the  amount  of  the 
interest  charged  by  the  bank  upon  such  loan,  to  be  collected  by  the 
Comptroller  and  covered  into  the  Treasury  of  the  United  States. 

This  bill  also  prohibited  overdrafts  by  any  officer  or  employee 
of  the  bank,  and  provided  for  carrying  into  effect  the  recommen- 
dation of  Mr.  Dawes,  heretofore  referred  to,  in  regard  to  the  limi- 
tation of  loans. 

On  the  subject  of  bank  reserves,  Mr.  Dawes  expressed  the 
belief  that  too  great  latitude  is  given  the  banks  in  connection  with 
the  use  of  their  reserves,  and  recommended  that  the  law  be 
amended  requiring  a  larger  proportion  of  the  reserve  to  be  kept 
in  cash  in  the  vaults  of  the  bank,  for  the  reason  that  the  ability  of 
the  banks  to  use  credits  with  reserve  agents  as  a  basis  of  loans 
creates  too  great  an  extension  of  aggregate  deposit  credits,  as 
compared  with  aggregate  cash  resources. 

This  condition,  Mr.  Dawes  contended,  increased  in  times  of 
liquidation  and  financial  panic  the  necessity  for  the  banks  to 
demand  payment  of  loans  and  added  to  the  demoralization  of  busi- 
ness. He  expressed  the  opinion  that  by  increasing  the  restrictions 
upon  the  right  of  the  banks  to  count  deposits  with  reserve  agents 
as  cash,  a  firmer  and  safer  foundation  would  be  built  under  the 
deposit  credits  of  the  country,  and  in  times  of  liquidation  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  237 

greater  strength  of  the  banks  would  more  than  compensate  them 
for  the  loss  of  the  small  amount  of  interest  on  a  portion  of  their 
balances  which  would  result  from  a  change  in  the  law. 

The  Comptroller  therefore  recommended  that  one-fifth,  in- 
stead of  three-fifths  of  the  reserve  of  fifteen  per  cent,  then 
required  by  law  to  be  kept  by  banks  not  reserve  agents  may  con- 
sist of  balances  due  from  reserve  banks,  and  that  the  law  permit- 
ting reserve  city  banks  to  keep  one-half  of  their  reserve  with  cen- 
tral reserve  city  banks  be  repealed. 

The  adoption  of  the  amendments  suggested  by  Mr.  Dawes 
would  have  prevented  the  concentration  of  so-called  reserve  in  the 
three  central  reserve  cities  of  New  York,  Chicago  and  St.  Louis, 
which  funds  in  times  of  panic,  such  as  in  1907,  were  shown  not  to 
be  reserve  at  all,  but  simply  loans  not  available  on  demand. 

Reserve  Cities  with  Population  of  Twenty-five  Thousand 

In  April,  1900,  the  Finance  Committee  of  the  United  States 
Senate  requested  an  expression  of  opinion  from  Mr.  Dawes  on  a 
bill  then  pending  before  that  committee  to  permit  cities  with  a 
population  of  twenty-five  thousand  to  become  reserve  cities  upon 
application  of  three-fourths  of  the  national  banks  located  therein. 
This  bill  became  a  law  on  March  3,  1903. 

In  commenting  upon  this  proposed  amendment  to  the  law,  Mr. 
Dawes  stated  that  there  should  be  a  radical  modification  of  the 
law  in  regard  to  reserves,  and  that  greater  restrictions  should  be 
placed  upon  the  right  of  a  bank  to  count  as  a  part  of  its  legal 
reserve  so  large  an  amount  of  credit  with  a  reserve  agent.  The 
law  as  it  existed  then,  he  stated,  allowed  too  great  a  latitude  to 
the  banks  to  use  reserve  credits  for  the  purpose  of  increasing  their 
business,  thereby  increasing  too  greatly  the  disproportion  between 
the  deposit  liabilities  of  the  banks  and  the  aggregate  cash  re- 
sources with  which  to  meet  them. 

No  matter  how  many  reserve  cities  were  created  the  rate  of 
interest,  he  contended,  or  the  terms  upon  which  balances  could  be 
used,  together  with  the  facilities  for  exchange  at  the  principal 
moneyed  centers,  would  largely  control  the  selection  of  corre- 
spondents. The  demand  for  New  York  and  Chicago  exchange 


238  ROMANCE  AND  TRAGEDY  OF  BANKING 

would  always  necessitate  the  selection  of  banks  in  those  cities  as 
correspondents  of  interior  banks.  He  expressed  the  belief  that 
the  provisions  of  law  then  in  force  in  respect  to  reserve  deposits, 
in  their  practical  effect,  were  productive  of  harm  to  the  legitimate 
business  interests  of  the  country,  and  for  that  reason  he  recom- 
mended that  they  should,  to  some  extent,  be  modified.  The  dis- 
proportion between  the  deposit  credits  in  the  banks  and  the 
amount  of  cash  actually  held  as  reserve  against  them  was  consid- 
erably less  than  fifteen  per  cent,  of  the  aggregate  deposit 
liabilities. 

Every  national  bank  in  the  country  was  presumed  by  law  to 
be  on  a  conservative  basis,  so  far  as  its  ability  to  redeem  deposits 
was  concerned,  when  it  had  on  hand  in  cash,  and  on  deposit  with 
approved  reserve  agents,  twenty-five  per  cent,  of  the  amount  of 
its  total  deposits. 

In  the  smaller  cities  or  towns  a  less  proportion  of  cash  and 
cash  resources  to  total  deposits  was  deemed  legally  consistent  with 
conservative  banking.  When  the  cash  and  reserve  accounts  ex- 
ceeded to  any  extent  the  twenty-five  per  cent,  limit,  the  bank, 
under  the  generally  accepted  rule,  could  safely  loan  the  excess.  In 
the  determination  of  its  ability  to  loan,  a  bank  did  not  ordinarily 
consider  the  relation  of  the  amount  of  cash  in  the  vaults  to  the 
amount  of  its  credits  with  reserve  agents,  for  the  reason  that  in 
usual  practice  the  reserve  agent  would  remit  when  called  upon,  or 
the  bank  could  sell  for  cash  to  neighboring  banks,  exchanges 
drawn  against  its  balance  with  the  reserve  agent.  It  is  the  rela- 
tion of  the  sum  of  the  cash  and  reserve  balances  to  deposits  which 
determines  whether  or  not  the  bank  is  in  a  condition  to  loan. 

The  fact  that  national  and  other  banks  were  allowed  to  loan 
on  the  strength  of  their  deposits  in  other  banks,  as  well  as  on 
account  of  the  cash  actually  held  in  their  vaults,  meant  that  the 
actual  cash  held  by  them  into  which  checks  and  drafts  were  by 
their  terms  and  by  practice  concurrently  convertible,  was  much 
less  than  twenty-five  per  cent,  of  the  deposits.  This,  together 
with  the  fact  that  one  bank  would  credit  as  a  deposit  redeemable 
in  cash  a  check  on  another  bank,  meant  that  the  banks  added  to 
the  purchasing  power  of  the  community,  or,  in  other  words,  cre- 
ated deposit  credits  for  the  community. 


ROMANCE  AND  TRAGEDY  OF  BANKING  239 

Mr.  Dawes  expressed  a  doubt  as  to  whether,  taken  as  a  whole, 
the  handling  of  large  bank  deposit  balances  is  profitable  to  the 
banks.  Bank  balances  are  the  most  unstable  of  all  deposits,  he 
said,  and  are  the  most  expensive  accounts,  not  only  because  of  the 
interest  paid  on  them  but  because  of  their  extreme  activity. 
Through  such  accounts  the  reserve  cities  were  subject  to  a  strain 
in  times  of  financial  stress,  which  endangered  the  stability  of  the 
entire  banking  system.  A  large  number  of  bank  deposit  accounts 
swells  the  totals  of  a  bank's  statement,  and  perhaps  serves  to 
attract  other  business  of  a  more  desirable  nature,  but  the  advan- 
tages of  such  business  are  exceedingly  doubtful. 

Recognizing  the  instability  of  such  deposits,  the  banks,  Mr. 
Dawes  stated,  must  loan  their  money  on  call,  and  to  secure  suf- 
ficient call  loans,  they  must  go  into  the  speculative  exchanges, 
for  it  is  only  by  loaning  upon  speculative  securities  that  the  banks 
are  enabled  to  pay  the  high  rate  of  interest  on  bank  balances, 
which  is  the  attraction  to  the  country  banks  for  the  deposit  of  a 
greater  proportion  of  their  funds  in  New  York  than  is  needed  for 
clearances  or  exchanges. 

By  way  of  illustrating  the  correctness  of  this  reasoning.,  Mr. 
Dawes  called  attention  to  the  fact  that  during  his  term  as  Comp- 
troller there  occurred  a  marked  demonstration  of  the  evil  effects 
of  the  practice  referred  to  upon  the  legitimate  business  of  the 
country.  At  that  time  there  was  a  material  slackening  in  the 
demand  for  money  in  the  interior  of  the  country,  and  the  country 
banks  found  it  difficult  to  safely  loan  their  funds.  As  a  result  the 
interest  paid  by  the  eastern  banks  upon  deposit  balances  at- 
tracted an  immense  surplus  to  New  York  City  and  other  eastern 
cities.  This  redundancy  of  money  in  New  York  and  the  ease  with 
which  loans  upon  speculative  collaterals  could  be  obtained,  imme- 
diately created  a  speculative  movement  in  stocks  which  was  car- 
ried on  with  a  constantly  rising  range  of  prices  until  the  fall  of 
that  year.  At  that  time  the  crop  movement  in  the  West  and  the 
rising  rate  of  interest  in  the  inerior  compelled  the  banks  of  those 
sections  to  draw  upon  their  balances  in  New  York  and  to  order 
the  remittances  of  large  amounts  of  currency.  At  that  time  the 
business  of  the  country  was  in  a  prosperous  condition,  with  a  ten- 
dency toward  an  increase  in  general  prices  and  the  wages  of  labor. 


240  ROMANCE  AND  TRAGEDY  OF  BANKING 

There  was  no  lack  of  confidence  in  the  country  and  nothing  which 
indicated  panic  conditions,  but  the  demands  of  the  banks  of  the 
West  for  the  shipment  of  currency  on  deposit  with  reserve  agents 
resulted  in  a  panic  upon  the  Stock  Exchange  of  New  York,  which 
became  a  grave  menace  to  the  business  interests  of  the  entire  coun- 
try, by  curtailing  ordinary  credits  to  legitimate  business  and  com- 
mercial enterprises  to  such  an  extent  as  would  have  resulted  in 
great  damage  had  not  the  Secretary  of  the  Treasury  come  to  the 
relief  of  the  money  market  and  checked  the  rapidly  increasing 
stringency. 

While  the  exchange  business  of  the  interior  banks  always  will 
necessitate  large  deposit  balances  in  New  York  and  other  reserve 
cities,  and  higher  rates  of  interest  will  attract  idle  funds  to  the 
money  centers,  Mr.  Dawes  suggested  that  public  policy  demanded 
that  the  banks  of  the  country  should  be  required  to  keep  a  larger 
proportion  of  their  reserve  at  home  in  their  own  vaults  for  the 
protection  of  the  interests  of  their  depositors  in  times  of  stress. 

By  increasing  the  restrictions  upon  the  right  of  banks  to 
count  deposits  with  reserve  agents  as  cash,  he  said,  a  firmer  and 
safer  foundation  would  be  built  under  the  deposit  credits  of  the 
country,  and  in  times  of  liquidation  the  greater  strength  of  the 
banks  would  more  than  compensate  for  the  loss  of  the  small 
amount  of  interest  on  a  portion  of  their  bank  balances. 

Mr.  Dawes  therefore  recommended  that  the  law  be  so  amended 
as  to  permit  only  one-fifth,  instead  of  three-fifths,  of  the  fifteen 
per  cent,  reserve  then  required  to  be  kept  by  banks  not  reserve 
agents,  to  consist  of  balances  due  from  reserve  agents,  and  that 
the  provision  of  law  which  permitted  banks  in  reserve  cities  to 
keep  one-half  of  their  lawful  money  reserve  with  correspondent 
banks  in  central  reserve  cities  be  repealed,  thus  requiring  them  to 
keep  on  hand  at  all  times  in  their  own  vaults  the  twenty-five  per 
cent,  reserve  then  required  by  law  to  be  maintained. 

Mr.  Dawes  renewed  the  recommendation  that  had  been  so  fre- 
quently presented  by  his  predecessors  for  a  change  in  the  method 
of  compensating  national  bank  examiners,  from  a  fee  basis  to  a 
salary  allowance.  The  fee  system,  he  contended,  encouraged 
superficiality  in  examinations  and  interfered  with  a  proper  appor- 


ROMANCE  AND  TRAGEDY  OF  BANKING  241 

tionment  of  the  examiner's  time  among  the  different  banks  on  his 
list  for  examination. 


Amendments  to  the  Banking  Laws 

While  only  two  amendments  to  the  national  banking  laws  were 
enacted  during  Mr.  Dawes'  administration  as  Comptroller,  one  of 
these  had  a  very  important  bearing  upon  the  growth  of  the 
national  banking  system. 

The  Act  of  March  14,  1900,  authorized  the  formation  of 
banks  with  a  minimum  capital  of  twenty-five  thousand  dollars,  in 
places  the  population  of  which  did  not  exceed  three  thousand 
inhabitants.  Since  this  enactment  on  June  30,  1922,  4,323  banks, 
with  a  capital  each  of  less  than  fifty  thousand  dollars,  have  been 
added  to  the  system. 

The  same  Act  also  increased  the  maximum  circulation  that 
banks  might  issue  to  an  amount  equal  to  the  par  value  of  the  bonds 
deposited  as  security  therefor,  and  increased  the  amount  of  bonds 
that  could  be  received  for  circulation  to  an  amount  equal  to  the 
paid-in  capital  stock  of  the  bank. 

Before  the  adoption  of  this  amendment  to  the  law,  circulation 
was  limited  to  ninety  per  cent,  of  the  current  market  value  of  the 
bonds  deposited,  not  exceeding  par,  and  the  total  issue  of  circula- 
tion to  any  bank  was  restricted  to  ninety  per  centum  of  the 
paid-in  capital  of  the  association. 

The  issue  of  circulating  notes  of  the  denomination  of  five  dol- 
lars was  restricted  by  this  Act  to  an  amount  not  exceeding  one- 
third  of  the  outstanding  circulation  of  each  bank,  and  so  much  of 
the  Act  approved  July  12,  1882,  as  prohibited  any  national  bank 
from  increasing  its  circulation  within  six  months  after  the  circu- 
lation had  been  reduced,  was  repealed,  thus  adding  an  element  of 
flexibility  to  the  currency  issues. 

This  Act  also  authorized  the  Secretary  of  the  Treasury  to 
receive  United  States  notes  on  deposit,  without  interest,  from  any 
national  banking  association,  in  sums  of  not  less  than  ten  thou- 
sand dollars  and  to  issue  certificates  therefor  in  denominations  of 
not  less  than  five  thousand  dollars.  Such  certificates  were  author- 
ized to  be  counted  as  lawful  money  reserve  and  to  be  accepted  for 


242  ROMANCE  AND  TRAGEDY  OF  BANKING 

Clearing  House  balances  at  the  places  where  the  deposits  therefor 
were  made. 

In  anticipation  of  the  passage  of  this  Act,  and  while  it  was 
still  pending  before  Congress,  approximately  one  thousand  appli- 
cations for  authority  to  organize  national  banks  with  a  capital  of 
less  than  fifty  thousand  dollars  were  filed  with  the  Comptroller  of 
the  Currency,  showing  the  popularity  of  this  measure,  as  afford- 
ing national  banking  facilities  to  small  communities,  and  between 
the  date  of  the  passage  of  the  Act  and  October  31,  1900,  the  close 
of  the  last  report  year  of  Mr.  Dawes'  administration,  three  hun- 
dred and  eighty-two  banks  of  this  class  were  chartered. 


WILLIAM  B.  RIDGELY 
Comptroller  of  the  Currency,  1901-1908 


CHAPTER  XIII 

William  B.  Ridgely 

m  Y  TXLLIAM  B.  RIDGELY,  of  Illinois,  the  eleventh  Comp- 
\^/  troller  of  the  Currency,  was  appointed  by  President 
T  T  Roosevelt,  to  succeed  Charles  G.  Dawes,  October  1, 1901, 
and  served  a  period  of  six  years  and  six  months,  having  been  re- 
appointed  at  the  expiration  of  his  first  term.  He  resigned 
March  30,  1908. 

Mr.  Ridgely  was  born  in  Springfield,  HI.,  July  19,  1858.  Sev- 
eral generations  of  his  ancestors  were  bankers.  His  grandfather, 
Nicholas  Ridgely,  was  employed  in  the  St.  Louis  branch  of  the 
Bank  of  the  United  States,  and  afterward  organized  the  Ridgely 
National  Bank  of  Springfield.  His  father,  Charles  Ridgely,  was 
also  a  banker  and  was  president  of  the  Ridgely  National  Bank, 
in  which  the  former  Comptroller  obtained  his  early  banking 
experience. 

Mr.  Ridgely  attended  the  Rensselaer  Polytechnic  Institute  at 
Troy,  N.  Y.,  for  several  years,  taking  a  degree  of  Civil  Engineer 
in  1879.  Subsequently  he  engaged  in  mining,  manufacturing  and 
banking  in  Springfield,  particularly  in  the  coal  and  iron  indus- 
tries, and  was  vice-president  of  the  Ridgely  National  Bank. 

He  was  postmaster  at  Springfield  from  April  13,  1897,  to 
June  15,  1899.  He  was  elected  secretary  and  vice-president  of 
the  Republic  Iron  and  Steel  Company  and  removed  to  Chicago. 

He  resigned  as  Comptroller  to  accept  the  presidency  of  the 
National  Bank  of  Commerce  of  Kansas  City,  Mo.  This  bank 
failed  and  was  placed  in  the  hands  of  a  receiver  December  5,  1907. 
It  was  subsequently  restored  to  solvency  by  its  directors  and  prin- 
cipal stockholders,  and  after  reorganization  of  the  board  of  direc- 
tors, was  allowed  to  resume  business  March  30,  1908,  with  Mr. 
Ridgely  as  president.  Mr.  Ridgely  resigned  the  presidency  of  this 
bank  in  November,  1909,  and  returned  East  to  look  after  his 
private  business  interests.  He  was  also  connected  with  several 

243 


244  ROMANCE  AND  TRAGEDY  OF  BANKING 

manufacturing  enterprises.     He  died  at  the  Baltimore  Protestant. 
Infirmary  on  May  1,  1920,  after  undergoing  an  operation. 

Extension  of  the  Corporate  Existence  of  National  Banks 

When  Mr.  Ridgcly  assumed  charge  of  the  Currency  Bureau, 
the  first  matter  of  special  importance  to  engage  his  attention  was 
the  question  of  the  second  extension  of  the  corporate  existence  of 
national  banking  associations. 

The  original  Bank  Act  of  February  25,  1863,  provided  for  a 
period  of  succession  for  only  twenty  years  from  the  date  of  ap- 
proval of  the  Act.  Under  this  Act  four  hundred  and  eighty-eight 
national  banks  were  organized  for  a  period  of  nineteen  years  only. 
Had  this  provision  of  law  continued  in  force,  the  banks  would 
have  been  chartered  for  periods  of  shorter  duration  each  as  time 
progressed,  and  the  national  banking  system  would  have  termi- 
nated by  limitation  in  1883,  the  end  of  the  twenty-year  period 
from  the  date  of  passage  of  the  original  Act.  But  the  Act  of  Feb- 
ruary 25,  1863,  was  repealed  by  the  Act  of  June  3,  1864.  The 
latter  Act  recognized  and  corrected  this  incongruity  in  the  origi- 
nal enactment  by  changing  this  provision  of  law  so  as  to  make  the 
period  of  succession  of  a  bank  twenty  years  from  the  date  of  exe- 
cution of  the  organization  certificate,  thus  placing  all  banks,  no 
matter  when  organized,  on  an  equal  footing  as  to  the  duration  of 
their  existence. 

Of  the  four  hundred  and  eighty-eight  banks  that  were  organ- 
ized under  the  Act  of  February  25,  1863,  one  hundred  and  fifty- 
one  were  placed  in  liquidation  by  their  stockholders,  twenty-one 
went  out  of  existence  by  reason  of  the  expiration  of  their  charters, 
thirty-five  were  closed  because  of  insolvency,  one  failed  to  com- 
plete its  organization,  and  the  charters  of  two  hundred  and  eighty 
were  extended  for  a  further  period  of  twenty  years  under  the  Act 
of  July  12,  1882,  which  authorized  such  extension. 

The  first  of  the  extended  charters  granted  under  the  Act  of 
July  12,  1882,  expired  July  12,  1902,  and  when  Mr.  Ridgely 
assumed  charge  of  the  Currency  Bureau  there  was  no  authority 
of  law  to  extend  the  charter  of  a  bank  the  second  time,  or  at  least 
there  was  such  grave  doubt  as  to  whether  a  second  extension  was 


245 

authorized  by  the  Act  of  July  12,  1882,  that  legislation  was 
deemed  necessary  or  advisable.  Mr.  Ridgely  therefore  recom- 
mended and  secured  the  passage  of  the  Act  of  April  12,  1902, 
authorizing  a  further  extension  for  the  period  of  twenty  years, 
and  thus  avoided  the  enforced  liquidation  at  the  termination  of 
their  second  twenty-year  period  of  a  large  number  of  banks  and 
their  reorganization  into  new  associations  if  they  desired  to  con- 
tinue in  the  national  system. 

Robbery  of  the  Merchants  National  Bank  of  Lowell,  Mass. 

On  October  17,  1901,  the  largest  bank  robbery  recorded  in  the 
annals  of  the  national  banking  system  occurred  at  the  Merchants 
National  Bank  of  Lowell,  Mass. 

The  capital  stock  of  this  association  was  $400,000,  its  surplus 
and  undivided  profits  over  $300,000,  and  its  total  liabilities  over 
$1,500,000.  The  bank  was  one  of  the  oldest  national  associations 
in  the  State  of  Massachusetts,  its  charter  number  being  506. 

It  appears  from  the  history  of  the  robbery  that  for  a  year 
or  more  before  it  occurred,  Albert  G.  Smith,  the  teller,  who  had 
been  employed  in  the  bank  for  about  eight  years,  and  Lewis  K. 
Swift,  a  bookkeeper,  who  had  also  been  in  the  service  of  the  bank 
for  a  number  of  years,  conceived  the  idea  of  getting  rich  quickly 
through  the  temporary  use  of  the  bank's  funds  in  stock  specula- 
tions. These  two  employees  entered  into  a  conspiracy  to  extract 
from  the  funds  of  the  association  an  amount  of  money  sufficient 
to  enable  them  to  purchase  the  stock  of  a  certain  corporation 
which  they  had  reason  to  believe  would  materially  enhance  in  value 
in  a  short  time  and  enable  them  to  pay  back  the  money  abstracted 
from  the  bank  and  realize  a  handsome  profit  for  themselves,  with- 
out detection  by  the  bank's  officers  or  the  bank  examiner.  Their 
method  of  abstraction  of  the  money  and  concealment  of  the  short- 
age was  as  follows : 

They  were  well  acquainted  with  all  of  the  depositors  in  the 
bank  and  their  business  dealings  with  the  institution,  and  selected 
with  care  the  particular  accounts  which  they  determined  to 
manipulate.  When  a  depositor  who  carried  a  considerable  bal- 
ance made  a  deposit  the  teller  would  credit  the  full  amount  of  such 


246 

deposit  in  the  pass  book  of  the  depositor  in  the  customary  way, 
and  pass  the  deposit  slip  to  his  confederate,  the  bookkeeper,  who 
would  enter  one-half  of  the  amount  to  the  credit  of  the  depositor 
in  the  individual  ledger  and  appropriate  the  balance  for  the  use 
of  himself  and  the  teller. 

This  method  of  embezzlement  was  carried  on  for  some  time, 
until  they  accumulated  sufficient  funds  to  make  the  purchase  of 
the  stock  they  desired.  The  shortage  was,  of  course,  concealed 
by  false  entries  in  the  books  of  the  bank,  as  it  was  impossible 
either  for  the  officers  of  the  bank  or  the  bank  examiner  to  detect 
the  shortage  except  by  comparison  of  the  manipulated  accounts 
with  the  passbooks  in  the  hands  of  the  depositors  whose  funds 
were  embezzled. 

They  invested  the  proceeds  of  their  peculations  in  the  partic- 
ular stock  they  desired  to  acquire,  but  instead  of  the  stock  ad- 
vancing in  price,  as  they  had  anticipated,  it  immediately 
depreciated  in  value,  and  they  were  compelled  to  use  more  of  the 
bank's  funds  by  the  same  procedure  to  make  good  the  margin 
required  to  protect  their  investment.  This  process  continued  until 
their  losses  became  so  large  that  their  only  hope  was  to  go  into 
the  market  and  speculate  in  stocks  generally.  They  continued  to 
use  the  bank's  funds  until  the  total  sum  of  their  abstractions 
amounted  to  over  one  hundred  thousand  dollars,  all  of  which  was 
invested  in  the  purchase  of  stocks. 

For  a  time  they  were  successful  in  their  speculations,  and  at 
one  time  recovered  the  entire  losses  that  they  had  previously  sus- 
tained to  within  two  or  three  thousand  dollars.  But  immediately 
preceding  the  phenomenal  advance  in  stocks  occasiond  by  the  cor- 
ner effected  in  the  stocks  of  the  Northern  Pacific  Railroad  Com- 
pany, they  had  disposed  of  their  holdings  of  that  stock  short  to  a 
considerable  extent,  which  caused  their  losses  to  again  reach 
nearly  one  hundred  thousand  dollars. 

About  this  time  a  dispute  arose  in  the  bank  between  a  depos- 
itor and  the  assistant  cashier  in  regard  to  an  apparent  overdraft 
in  the  account  of  the  former,  which  was  heard  by  one  of  the  em- 
bezzlers, and  knowing  that  an  investigation  of  this  particular 
account  would  follow  and  lead  to  a  discovery  of  the  shortage,  as 
this  was  one  of  the  accounts  that  had  been  manipulated,  he  noti- 


ROMANCE  AND  TRAGEDY  OF  BANKING  247 

fied  his  partner  in  crime,  who  was  absent  on  vacation,  and  urged 
him  to  return  to  Lowell  at  once,  which  he  did,  and  after  a  confer- 
ence over  the  situation  they  determined  to  rob  the  bank  of  all  the 
funds  and  securities  they  could  obtain  and  make  away  with  them. 
Accordingly,  between  the  hours  of  ten  and  eleven  o'clock  on  the 
night  the  robbery  occurred  they  gained  access  to  the  bank  and 
stole  between  twenty-two  and  twenty-three  hundred  thousand  dol- 
lars in  cash  and  securities  and  immediately  left  for  Boston,  a  dis- 
tance of  only  twenty-five  miles,  where  they  placed  their  plunder 
in  the  hands  of  other  parties  for  safe-keeping. 

On  the  following  morning  they  consulted  and  engaged  counsel 
in  Boston  to  advise  them  what  they  should  do,  and  through  this 
counsel  secured  the  services  of  a  prominent  attorney  at  Lowell 
with  a  view  to  opening  negotiations  with  the  bank's  officers  and 
making  the  best  terms  of  settlement  possible  as  a  condition  prece- 
dent to  the  return  of  the  stolen  assets. 

When  the  national  bank  examiner  commenced  an  examina- 
tion on  the  morning  following  the  robbery,  he  having  been  sum- 
moned to  the  bank  by  its  officers,  he  found  a  very  serious  condition 
of  affairs.  All  of  the  cash,  notes,  collateral  and  securities  were 
missing  and  the  bank  had  been  completely  looted  and  stripped  of 
everything. 

If  the  property  had  not  been  recovered  the  bank  would  havr 
been  hopelessly  insolvent,  and  had  the  real  condition  of  affairs 
been  known  at  the  time,  public  confidence  in  Lowell  and  vicinity 
would  have  been  badly  shaken  and  a  serious  disturbance  would  no 
doubt  have  resulted.  The  counsel  for  the  absconding  teller  and 
bookkeeper,  however,  immediately  opened  negotiations  with  the 
officers  of  the  bank  for  the  return  of  the  stolen  property,  and 
plans  were  discussed  for  making  the  bank  solvent  if  the  assets 
were  not  recovered.  In  the  meantime  the  teller  and  bookkeeper 
remained  in  hiding  in  the  vicinity  of  Boston. 

After  various  consultations  by  the  directors  by  telephone  with 
the  attorneys  for  the  culprits,  a  meeting  between  the  attorneys 
and  a  committee  composed  of  two  directors  of  the  bank  was 
arranged  for  and  held.  The  robbery  occurred  on  Thursday  night, 
and  this  meeting  was  held  shortly  before  midnight  on  the  Sunday 
following,  at  which  an  arrangement  was  made  for  the  return  of 


248  ROMANCE  AND  TRAGEDY  OF  BANKING 

all  the  property  of  the  bank,  less  a  certain  sum  withheld  for  ser- 
vices and  expenses,  and  between  one  and  two  o'clock  on  Monday 
morning  one  of  the  attorneys  for  the  robbers  delivered  at  the  bank 
all  of  the  cash  and  securities  that  had  been  taken,  which,  after 
being  counted  and  examined  by  the  bank  examiner  and  some  of 
the  officers  of  the  bank,  were  found  to  be  intact,  except  about  a 
thousand  dollars  in  cash,  which  is  supposed  to  have  been  used  in 
expenses  of  counsel. 

In  justice  to  the  attorneys  for  the  culprits,  it  should  be  stated 
that  at  the  very  outset  they  informed  their  clients  that  they 
would  accept  employment  only  upon  the  condition  that  they  would 
agree  to  return  every  dollar  of  the  bank's  property  in  their  pos- 
session, otherwise  they  would  have  nothing  to  do  with  the  case. 
They  agreed  to  do  this,  whereupon  the  stolen  property  was  sur- 
rendered to  the  attorneys,  and  by  them  returned  to  the  bank. 

No  promises  of  immunity  from  punishment  were  made  by  the 
directors  of  the  bank  as  a  condition  precedent  to  the  return  of 
the  property,  notwithstanding  the  statements  published  in  the 
newspapers  at  the  time  to  the  contrary,  and  if  any  had  been  made 
they  would  have  been  of  no  avail,  as  the  examiner  who  had  infor- 
mation of  the  robbery  would  have  reported  the  facts  to  the  United 
States  Attorney  for  action,  as  is  done  in  every  case  of  dishonesty 
or  criminal  violation  of  the  banking  laws  which  comes  to  the 
attention  of  examiners. 

The  embezzlers  knew  this,  and  they  also  knew  that  there  was 
no  possibility  of  escaping  with  their  plunder,  so  they  finally  con- 
sented to  surrender  it.  They  were  also  advised  by  their  counsel 
to  surrender  themselves  and  take  the  consequences  of  their  acts, 
and  their  counsel  offered  to  defend  them  on  trial,  but  this  they 
declined  to  do. 

As  soon  as  the  stolen  assets  were  recovered  and  the  bank's 
affairs  were  found  to  be  in  a  satisfactory  condition,  the  bank 
examiner  reported  all  the  facts  to  the  United  States  Attorney  at 
Boston,  and  although  Pinkerton  detectives  were  placed  on  the 
trail  of  the  robbers  they  never  were  captured.  It  was  currently 
reported  at  the  time  that  they  succeeded  in  escaping  from  this 
country  and  had  gone  to  South  America,  or  some  other  country 


ROMANCE  AND  TRAGEDY  OF  BANKING  249 

with  which  the  United  States  had  no  extradition  treaty  covering 
their  offense. 

It  was  the  generally  accepted  theory  that  the  motive  of  the 
teller  and  bookkeeper  in  stealing  the  assets  of  the  bank  in  bulk 
was  to  compel  the  bank's  officers  to  settle  with  them  on  the  most 
favorable  terms  for  their  previous  embezzlements,  and  that  this 
desperate  measure  was  suggested  by  an  occurrence  of  a  similar 
nature  on  a  smaller  scale  more  than  twenty  years  previously  in 
the  same  section  of  the  country. 

While  the  business  of  the  bank  proceeded  as  usual  without  in- 
terruption, on  January  4,  1902,  the  association  was  placed  in 
voluntary  liquidation  by  a  vote  of  its  stockholders  and  with  two 
other  banks  was  merged  into  the  Union  National  Bank  of  Lowell, 
which  bank  commenced  business  on  January  6,  1902. 

The  Baltimore  and  San  Francisco  Fires 

The  great  conflagrations  in  Baltimore  and  San  Francisco, 
which  completely  destroyed  millions  of  dollars  of  banking  prop- 
erty and  devastated  the  principal  business  sections  of  those  cities, 
occurred  during  the  administration  of  Mr.  Ridgely. 

The  Baltimore  fire  started  on  Sunday  morning,  February  7, 
1904,  between  the  hours  of  ten  and  eleven  o'clock.  It  originated 
in  the  warehouse  of  the  John  E.  Hurst  Company,  at  the  corner 
of  German  and  Sharp  streets,  and  was  immediately  followed  by 
a  succession  of  explosions,  causing  the  flames  to  rapidly  extend 
to  adjoining  buildings.  A  strong  wind  was  blowing  at  the  time, 
and  within  an  hour  or  two  a  dozen  buildings  were  involved,  and 
the  fire  continued  to  advance  to  the  north  and  east,  destroying 
everything  in  its  path  and  increasing  in  intensity  until  at  sun- 
down eight  or  ten  entire  blocks  were  in  flames  or  in  ruins.  Early 
on  Monday  night  the  wind  shifted  in  the  opposite  direction,  carry- 
ing the  flames  toward  the  waterfront.  Dynamite  was  freely  used 
in  an  effort  to  stay  its  progress,  but  without  effect.  Fire  engines 
were  sent  from  Washington,  Philadelphia,  Harrisburg,  New  York 
and  other  nearby  cities,  but  notwithstanding  this  assistance  the 
fire  continued  to  burn  with  ferocity  until  Sunday  night,  when 
everything  was  consumed  to  the  waterfront  of  the  inner  harbor. 


250 

Early  on  Monday  morning  the  Governor  of  the  State,  by 
proclamation,  declared  a  legal  holiday,  extending  from  Febru- 
ary 8  to  February  22,  in  order  to  protect  maturing  paper  and 
afford  the  banks  an  opportunity  to  secure  temporary  quarters 
and  resume  business.  The  buildings  of  twenty  banks  and  trust 
companies  were  completely  destroyed,  and  for  a  number  of  days 
the  greatest  anxiety  prevailed  in  regard  to  the  safety  of  the  cash 
and  securities  stored  in  their  overheated  vaults,  twelve  of  which 
were  known  to  contain  eighty  or  ninety  millions  of  dollars  in  loans 
and  discounts,  securities  of  various  kinds,  clearing  house  ex- 
changes, and  cash.  Fortunately,  however,  these  vaults  stood  the 
test  of  the  fire,  and  when  they  were  opened,  after  being  allowed  to 
cool,  their  contents  were  found  to  be  well  preserved.  While  many 
of  the  banks  lost  their  records  in  whole  or  in  part,  there  was  not 
a  single  instance  of  loss  of  securities  or  cash,  and  when  business 
was  formally  resumed  on  February  23d,  nearly  all  matured  paper, 
checks  and  drafts  were  honored  when  presented  for  payment. 
None  of  the  banks  suspended  as  a  result  of  the  fire,  and  business 
was  not  even  interrupted,  except  during  the  progress  of  the  fire, 
the  banks  having  secured  temporary  quarters  in  other  sections  of 
the  city. 

The  total  value  of  the  property  destroyed  by  this  conflagra- 
tion has  been  estimated  at  between  one  hundred  and  twenty-five 
and  one  hundred  and  fifty  millions  of  dollars.  The  total  value  of 
the  banking  houses  and  furniture  and  fixtures  of  the  ten  national 
banks  whose  buildings  were  destroyed,  as  shown  by  their  last 
report  of  condition  made  to  the  Comptroller  of  the  Currency  im- 
mediately before  the  fire,  was  two  millions,  two  hundred  and 
twenty-one  thousand,  nine  hundred  and  eighty  dollars.  Their  net 
loss  over  and  above  insurance  has  not  been  stated. 

On  the  morning  of  April  18,  1906,  as  the  result  of  a  severe 
earthquake,  fire  broke  out  simultaneously  in  several  widely  separ- 
ated sections  of  San  Francisco,  and  owing  to  the  breaking  of  the 
Spring  Valley  Water  Company's  mains,  there  was  no  water  sup- 
ply with  which  to  combat  the  flames.  Dynamite  was  used  in  an 
effort  to  check  the  spread  of  the  fire,  but  with  little  or  no  effect. 
Every  banking  house  in  San  Francisco  was  practically  destroyed, 
with  the  exception  of  the  Columbia  Savings  and  Loan  Society,  an 


ROMANCE  AND  TRAGEDY  OF  BANKING  251 

institution  which  did  not  transact  a  commercial  business,  and  the 
Market  Street  Bank,  a  small  institution,  whose  premises  were 
damaged  but  not  destroyed. 

The  direct  fire  losses  to  the  banks  consisted  of  their  furniture 
and  fixtures,  and  the  banking  houses  of  such  institutions  as  owned 
their  buildings.  The  indirect  losses  through  loans  never  have 
been  made  public. 

The  fire  raged  fiercely  for  about  three  days,  and  when  it  was 
finally  brought  under  control  an  informal  meeting  of  the  bankers 
and  representatives  of  financial  interests  was  held  and  arrange- 
ments were  made  for  the  protection  of  bank  vaults  and  their  con- 
tents and  for  continuing  legal  holidays  by  proclamation  of  the 
Governor  as  long  as  the  emergency  made  it  desirable  or  necessary. 
The  clearing  house  association  appointed  an  emergency  finance 
committee  and  arranged  for  advancing  to  depositors  in  the  banks 
limited  amounts  on  account  to  enable  them  to  meet  their  personal 
needs.  Quarters  were  provided  for  the  clearing  house  banks  at 
the  United  States  Mint  and  a  manager  for  the  banks  was  ap- 
pointed. A  number  of  banks  opened  accounts  with  the  Clearing 
House  Bank  by  depositing  cash  against  which  they  issued  orders 
in  favor  of  their  depositors  who  applied  for  small  advances.  These 
advances  were  made  in  the  form  of  promissory  notes.  Practically 
during  the  whole  period  that  the  Clearing  House  Bank  was  in 
operation  most  of  the  banks  had  no  available  records  showing  the 
amounts  due  their  respective  depositors,  their  books  being  locked 
up  in  their  overheated  vaults. 

In  the  meantime  the  banks  had  made  or  were  making  arrange- 
ments for  office  accommodations  in  private  residences  in  the  west- 
ern quarter  of  the  city  and  were  doing  the  best  they  could  in  the 
way  of  handling  business  until  some  permanent  order  could  be 
established.  They  were  without  books,  stationery  or  other  sup- 
plies. Everything  of  that  nature  that  had  not  been  destroyed  by 
the  fire  was  locked  in  their  vaults,  which  could  not  be  opened  for 
several  weeks,  and  it  was  some  time  subsequent  to  the  regular 
resumption  of  business  before  many  of  the  banks  were  able  to 
Accurately  adjust  their  accounts. 

At  a  meeting  of  the  Clearing  House  Association  on  May  16, 
it  having  been  ascertained  that  nearly  all  the  banks  had  gained 


252  ROMANCE  AND  TRAGEDY  OF  BANKING 

access  to  their  vaults,  it  was  determined  that  business  could  be 
safely  resumed  on  May  23d,  and  it  was  so  ordered,  and  all  the 
banks  regularly  reopened  on  that  date. 

As  an  instance  of  the  precaution  taken  by  some  of  the  banks 
to  safeguard  their  assets,  when  the  fire  approached  dangerously 
near  the  Crocker  National  Bank,  and  building  after  building  had 
been  consumed,  the  coin  vault  was  thrown  open  and  a  score  of 
clerks  hurriedly  stacked  the  coin  in  trays  and  loaded  it  on  coin 
trucks  with  a  haste  accelerated  by  the  information  received  that 
dynamiting  was  to  commence  in  the  immediate  vicinity.  All  the 
securities  of  the  bank,  books  of  account,  current  statements,  de- 
posit slips  and  checks  for  April  17th,  were  loaded  on  a  dray  and 
hauled  to  the  St.  Francis  Hotel,  which  at  that  time  was  thought 
to  be  out  of  the  danger  zone,  and  were  carried  to  a  room  on  the 
second  floor,  where  they  were  placed  under  guard  made  up  of  the 
officers  and  clerks  of  the  bank,  who  relieved  each  other  in  shifts. 
Toward  midnight  of  the  same  day  the  fire  reached  the  block  on 
which  the  hotel  was  located,  making  it  necessary  to  again  move 
the  bank's  valuables  to  safer  quarters.  They  were  then  removed, 
part  of  the  way  on  wheelbarrows,  to  the  home  of  one  of  the  officers 
of  the  bank  in  the  western  addition,  a  section  not  reached  by  the 
fire,  and  were  stored  in  the  basement  of  his  house,  where  they 
remained  over  night  and  part  of  the  next  day,  when  they  were 
packed  in  trunks  and  chests  and  conveyed  to  the  wharf  at  Fort 
Mason,  where  they  were  placed  on  a  Government  tug  stationed 
there  and  subsequently  transferred  to  the  safe  deposit  vaults  of 
the  bank,  where  all  the  appointments  were  intact. 

The  Chicago  National  Bank 

What  might  have  proved  a  very  disastrous  failure  in  Decem- 
ber, 1905,  was  averted  by  the  wise  and  timely  course  of  Mr. 
Ridgely,  with  the  co-operation  of  the  associated  banks  in  Chicago. 
The  Chicago  National  Bank,  of  which  John  R.  Walsh  was  presi- 
dent, was  discovered  to  be  in  a  very  precarious  condition,  because 
of  large  loans  made  by  Walsh  to  various  concerns  with  which  he 
was  identified  and  which  he  either  owned  or  controlled. 


ROMANCE  AND  TRAGEDY  OF  BANKING  253 

This  bank  had  a  capital  stock  of  $1,000,000,  surplus  of 
$1,457,000,  and  deposits  of  $20,000,000.  The  bank  had  been  the 
subject  of  the  Comptroller's  special  attention  for  about  two  years 
previous  to  its  suspension.  Mr.  Walsh  was  reputed  to  be  worth 
several  millions  of  dollars.  He  was  identified  with  numerous  enter- 
prises, some  of  which  were  on  a  large  scale.  He  had  been  a  suc- 
cessful business  man  and  had  raised  himself  from  obscurity  to  a 
position  of  financial  affluence.  While  the  aggregate  of  the  loans 
by  the  bank  to  the  Walsh  enterprises  amounted  to  a  very  large 
part  of  the  total  deposits,  and  more  than  double  the  amount  of 
the  capital  and  surplus  of  the  association,  these  loans  were  dis- 
tributed among  a  number  of  different  concerns,  each  of  which  was 
engaged  in  a  different  line  of  business.  In  the  Walsh  combination 
there  were  three  railroads,  three  gas  companies,  a  large  news- 
paper, a  stone  quarry,  a  coal  company  and  other  enterprises  of 
greater  or  less  magnitude. 

While  all  of  these  concerns  were  affiliated  and  in  the  hands  of 
the  same  interest,  they  were  separate  corporations,  and  as  such 
were  entitled  under  the  law  to  receive  a  loan  each  equal  to  ten  per 
cent,  of  the  capital  of  the  bank.  Some  of  these  loans  exceeded  the 
legal  limit  and  were  required  by  the  Comptroller  to  be  reduced, 
but  none  of  them  were  regarded  as  dangerous  or  unsafe,  except 
in  the  hazard  attending  the  concentration  of  such  a  large  amount 
of  the  bank's  funds  in  the  hands  of  interests  so  closely  interwoven 
as  were  these  several  corporations.  Notwithstanding  this  fact, 
there  seemed  to  be  every  reason  to  believe  that  each  corporation 
of  the  group  would  be  carried  to  a  successful  outcome,  and  not 
only  pay  all  its  debts  but  leave  a  very  substantial  profit  to  Mr. 
Walsh  and  those  associated  with  him. 

In  addition  to  the  national  bank,  Mr.  Walsh  controlled  to  a 
large  extent  two  other  banking  corporations  in  Chicago,  the 
Equitable  Trust  Company  and  the  Home  Savings  Bank. 

In  June,  1905,  the  Comptroller,  through  the  national  bank 
examiner,  endeavored  to  arrange  with  the  State  bank  authorities 
of  Illinois,  a  simultaneous  examination  of  these  three  banking 
institutions,  with  a  view  to  ascertaining  the  aggregate  liabilities 
of  Walsh  and  his  several  corporations  and  interests  to  the  three 
concerns,  as  it  was  suspected  that  the  national  bank  was  really 


254          ROMANCE  AND  TRAGEDY  OF  BANKING 

in  a  worse  condition  than  it  appeared  to  be,  but  this  effort  tt> 
secure  the  co-operation  of  the  State  Banking  Department  failed, 
and  the  national  bank  had  to  be  examined  independently  as  usual. 
This  examination  developed  no  material  improvement  in  the  sit- 
uation. While  some  of  the  loans  that  had  been  previously  criti- 
cised and  required  to  be  reduced  had  been  curtailed,  others  had 
taken  their  place,  and  at  that  time  the  total  loans  of  the  national 
bank  to  the  several  Walsh  corporations  amounted  to  over 
$6,800,000,  while  some  of  the  loans  had  been  shifted  to  the  bond 
account. 

The  condition  disclosed  by  this  examination  convinced  the 
Comptroller  that  it  was  absolutely  necessary  to  secure  a  simul- 
taneous examination  of  the  three  institutions  before  the  real  con- 
dition of  the  national  bank  could  be  determined,  and  negotiations 
were  again  opened  with  the  State  Banking  Department  to  that 
end,  and  an  arrangement  finally  effected  for  an  examination  of 
the  three  banks  on  December  9,  1905. 

It  was  thought  that  this  joint  examination  would  disclose 
transfers  of  cash  or  securities  from  the  State  to  the  national  bank 
at  the  time  of  the  previous  examination  of  the  latter,  and  vice 
versa,  at  the  time  of  the  examination  of  the  State  institutions,  but 
such  did  not  prove  to  be  the  case.  No  shortage  of  cash  or  securi- 
ties in  either  institution  was  disclosed,  nor  anyhing  to  indicate 
any  manipulation  of  the  assets  or  accounts,  or  any  false  entries. 

Aside  from  the  large  amount  of  loans  made  by  the  Chicago 
National  Bank  to  the  Walsh  concerns,  the  bank  seemed  to  be  well 
managed,  its  other  loans  carefully  and  conservatively  made,  and 
its  books  and  accounts  accurately  and  well  kept,  always  reflecting 
the  true  condition  of  the  association. 

The  simultaneous  examination  of  the  three  banks,  however, 
developed  the  fact,  as  was  suspected,  that  in  addition  to  the  large 
loans  by  the  Chicago  National  Bank  to  the  Walsh  interests,  loans 
had  been  made  by  the  Home  Savings  Bank  and  the  Equitable 
Trust  Company  to  the  same  interests  to  an  amount  greater  in 
proportion  to  their  capital  stock  and  deposits  than  the  loans  made 
by  the  national  bank,  and  the  aggregate  of  the  loans  made  by  the 
three  institutions  amounted  to  between  fifteen  and  sixteen  millions 
of  dollars.  The  Home  Savings  Bank,  which  had  about  $4,272,000 


255 

of  deposits,  had  $3,836,000  of  these  loans,  and  the  Equitable 
Trust  Company,  with  deposits  amounting  to  $4,805,000,  had  over 
$4,250,000  of  them. 

This  knowledge  of  the  total  liabilities  of  the  Walsh  interests, 
acquired  through  this  joint  examination  of  the  three  banks,  made 
the  situation  much  more  critical  and  demanded  immediate  and 
decisive  action  on  the  part  of  the  Comptroller. 

If  the  amount  of  the  indebtedness  to  the  Chicago  National 
Bank  alone  had  represented  anything  like  the  total  liabilities  of 
the  Walsh  concerns,  there  would  have  been  reasonable  probability 
of  Mr.  Walsh  being  able  to  continue  the  sale  of  the  bonds  of  his 
corporations  and  from  the  proceeds  of  such  sales  pay  his  liabili- 
ties to  the  bank.  But  with  the  increased  amount  of  these  liabili- 
ties, as  shown  by  the  examination  of  the  three  institutions,  and 
with  practically  all  of  the  funds  of  the  two  State  banks  loaned  to 
the  Walsh  enterprises,  any  sudden  demand  made  upon  the  State 
banks  by  their  depositors  would  have  necessitated  their  being  sup- 
plied with  funds  by  the  national  association,  as  the  Equitable 
Trust  Company  had  only  about  five  thousand  five  hundred  dollars 
and  the  Home  Savings  Bank  about  twelve  thousand  dollars  in  cash 
at  the  time  of  their  examination,  but  they  had  on  deposit  with  the 
Chicago  National  Bank  fifty-four  thousand  dollars  and  one  hun- 
dred and  twenty-nine  thousand  dollars  respectively. 

At  this  stage  of  the  situation,  the  State  authorities  were  un- 
willing to  allow  the  State  banks  to  continue  doing  business,  unless 
something  was  done  to  strengthen  their  financial  condition,  and 
the  Comptroller  did  not  deem  it  safe  to  permit  the  national  bank 
to  open  for  business  on  Monday  morning,  with  the  certainty  that 
it  would  meet  with  trouble,  if  either  of  the  State  institutions 
became  involved,  or  a  run  was  started  upon  them  by  their 
depositors. 

This  was  the  condition  of  affairs  which  existed  on  Thursday, 
December  14,  1905,  and  the  Comptroller,  after  a  conference  with 
the  bank  examiner  by  telephone,  instructed  him  to  take  no  action 
until  after  the  close  of  business  at  noon  on  the  following  Satur- 
day, when  the  time  locks  had  been  set  on  the  vaults  to  prevent 
their  being  opened  before  Monday  morning,  then  to  call  a  meeting 


256  ROMANCE  AND  TRAGEDY  OF  BANKING 

of  the  Clearing  House  Association  and  advise  them  of  the  situa- 
tion. In  the  meantime,  the  Comptroller  left  Washington  for  Chi- 
cago, so  as  to  direct  matters  at  close  range.  He  arrived  in 
Chicago  on  Sunday,  December  17,  and  arranged  at  once  for  a 
conference  with  Mr.  Walsh  and  the  directors  of  his  bank,  at  which 
there  were  also  present  the  attorneys  for  the  Clearing  House 
Association  and  the  National  and  State  bank  examiners.  This 
conference  lasted  from  ten  o'clock  Sunday  morning  through  the 
night  until  seven  o'clock  on  Monday  morning. 

At  the  beginning  of  the  conference  the  Comptroller  announced 
his  determination  not  to  permit  the  national  bank  to  open  for 
business  on  Monday  morning  unless  some  satisfactory  arrange- 
ment was  made  to  insure  the  payment  in  full  of  all  demands  that 
might  be  made  by  the  creditors  upon  the  bank. 

This  conference  resulted  in  an  agreement  in  writing  between 
the  Chicago  National  Bank  and  the  Clearing  House  Association, 
representing  thirty-three  Chicago  banks,  under  the  terms  of  which 
the  latter  banks  purchased  from  the  Chicago  National  Bank  all 
of  its  assets,  except  cash  and  exchange,  partially  securing  them- 
selves by  obtaining  the  guarantee  of  the  directors  of  the  Chicago 
National  Bank  to  the  extent  of  their  individual  resources. 

The  First  Trust  and  Savings  Bank  of  Chicago  was  appointed 
by  the  associated  banks  agent  to  receive  and  liquidate  the  pur- 
chased assets,  under  the  direction  and  approval  of  the  Chicago 
Clearing  House  Committee. 

This  arrangement  was  entered  into  only  after  a  long  and  con- 
tinued discussion.  A  representative  of  every  bank  in  Chicago, 
which  was  a  member  of  the  Clearing  House  Association,  was  pres- 
ent at  the  meeting.  The  Comptroller  did  not  attempt  to  dictate 
any  of  the  provisions  of  the  agreement,  or  to  impose  any  condi- 
tions, except  to  insist  that  the  creditors  of  the  Chicago  National 
Bank  must  be  fully  protected,  otherwise  he  would  place  the  asso- 
ciation in  the  hands  of  a  receiver  on  Monday  morning. 

The  First  Trust  and  Savings  Bank  continued  to  act  as  agent 
for  the  clearing  house  banks  under  this  agreement  until  some 
time  in  1907,  when  it  was  considered  advisable  to  sell  to  John  R. 
Walsh  and  Company,  certain  of  the  railroad  and  other  securities 


ROMANCE  AND  TRAGEDY  OF  BANKING  257 

to  facilitate  their  liquidation,  the  consideration  being  the  prom- 
issory note  of  Walsh  and  Company,  secured  by  the  assets  pur- 
chased and  the  guarantee  of  the  directors  of  the  Chicago  National 
Bank.  The  assets  not  sold  to  Walsh  and  Company,  under  this 
agreement,  were  retained  by  the  associated  banks  and  continued 
to  be  administered  by  the  First  Trust  and  Savings  Bank  as  agent 
of  the  associated  banks.  Participation  certificates  were  issued  to 
the  associated  banks,  representing  their  pro  rata  interest  in  the 
assets  of  the  Chicago  National  Bank.  These  certificates  were 
issued  in  two  series,  designated  as  Series  A  and  Series  B.  Series 
A  represented  the  interest  of  the  associatd  banks  in  the  assets 
covered  by  the  promissory  note  of  John  R.  Walsh  and  Company, 
secured,  as  before  stated,  and  Series  B  represented  the  interest  of 
the  associated  banks  in  the  remaining  assets  which  were  being 
administered  by  the  First  Trust  and  Savings  Bank. 

This  plan  was  followed  until  January,  1910,  at  which  time  a 
ten  per  cent,  dividend  was  declared  on  both  series  of  certificates, 
and  a  settlement  was  arranged  with  John  R.  Walsh  and  Company 
whereby  the  assets  purchased  by  him  and  his  associates  were  taken 
back  by  the  associated  banks  and  the  promissory  note  canceled. 
This  settlement  included  the  releasing  of  the  directors  of  the  Chi- 
cago National  Bank  under  their  individual  guarantee,  in  consid- 
eration of  their  transferring  certain  of  their  personal  assets  to 
the  First  Trust  and  Savings  Bank  as  trustee  for  the  benefit  of  the 
associated  banks. 

At  this  juncture  Series  A  and  B  participation  certificates 
were  called  in  and  new  certificates  were  issued  in  lieu  thereof,  des- 
ignated Series  C.  These  certificates  were  dated  February  1,  1910, 
and  aggregated  approximately  nine  million  dollars.  They  were 
issued  to  the  associated  banks  to  cover  their  interest  in  all  the 
remaining  assets  of  the  Chicago  National  Bank. 

A  notable  coincidence  in  connection  with  the  conference  on  the 
night  of  December  17,  was  the  fact  that  there  were  three  ex- 
Comptrollers  of  the  Currency  and  one  Comptroller  present.  The 
three  ex-Comptrollers  were  Messrs.  Lacey,  Eckels  and  Dawes, 
each  of  whom  was  at  that  time  president  of  a  banking  institution 
in  Chicago. 


258          ROMANCE  AND  TRAGEDY  OF  BANKING 

Legality  of  the  Action  of  the  Clearing  House  Banks 

Notwithstanding  the  undoubted  wisdom  of  the  course  pursued 
by  Mr.  Ridgely  and  the  associated  banks  of  Chicago  in  thus 
averting  a  disastrous  bank  failure  and  a  serious  disturbance  to  the 
financial  and  business  interests  not  only  of  Chicago  but  of  other 
sections,  the  legality  of  the  action  of  the  clearing  house  banks  in 
entering  into  an  agreement  with  John  R.  Walsh  and  the  directors 
of  his  bank  to  pay  the  creditors  of  the  three  banks,  was  questioned 
by  some,  and  the  Comptroller  and  the  banks  were  subjected  to 
criticism.  But  the  situation  was  critical  and  called  for  prompt 
action.  There  was  no  time  to  waste  in  quibbling  over  legal  tech- 
nicalities. The  Comptroller  believed  that  the  national  banks  that 
were  members  of  the  Clearing  House  Association  had  legal  right 
to  purchase  from  the  directors  of  the  Walsh  banks  their  pro  rata 
share  of  the  assets  of  these  institutions.  The  only  possible  legal 
objection  that  could  be  raised  to  their  doing  so  was  whether  any 
bank  in  the  combination,  in  assuming  a  pro  rata  share  of  the  lia- 
bilities of  the  Walsh  banks,  exceeded  the  limitations  of  law  in 
respect  to  loans.  This  question,  however,  was  considered  so  un- 
important compared  with  the  tremendous  interests  at  stake  that 
neither  the  Comptroller  nor  the  banks  gave  it  any  consideration. 
It  would  have  been  inexcusable  for  the  Comptroller  to  have 
allowed  a  question  of  this  nature  to  have  interfered  with  the  con- 
summation of  the  arrangement  agreed  upon. 

When  the  magnitude  of  the  liabilities  of  the  Walsh  interests 
to  the  national  bank  and  the  other  banking  institutions  became  a 
matter  of  public  information,  the  Comptroller  was  further  criti- 
cised for  having  permitted  this  condition  to  continue  so  long 
before  corrective  measures  were  taken.  When  these  excessive 
loans  became  known  to  the  Comptroller  through  the  reports  of 
the  national  bank  examiners,  he  did  everything  in  his  power  to 
have  them  reduced  to  the  legal  limit,  not  only  by  correspondence 
with  the  directors  of  the  bank,  as  the  evidence  at  the  Walsh  trial 
demonstrated,  but  by  personal  conference  with  the  officers  and 
directors  of  the  association,  without  material  effect. 

The  sole  power  conferred  upon  the  Comptroller  of  the  Cur- 
rency to  enforce  a  compliance  with  the  law  in  regard  to  the  limit 


ROMANCE  AND  TRAGEDY  OF  BANKING  259 

of  loans  was  not  a  corrective  but  a  destructive  measure.  He  could 
no  doubt  have  compelled  the  Walsh  bank  to  reduce  the  excessive 
loans  under  a  threat  of  forfeiture  proceedings,  but  he  would  have 
destroyed  the  offending  association  by  instituting  such  a  suit. 

The  statutory  provision  authorizing  the  Comptroller  to  insti- 
tute a  suit  to  forfeit  the  charter  of  a  national  bank  for  violating 
the  law  has  never  been  construed  as  mandatory.  It  always  had 
been  interpreted  as  vesting  in  him  a  discretionary  power,  and  no 
Comptroller  ever  felt  that  he  would  have  been  justified  in  resort- 
ing to  so  drastic  a  measure  without  first  endeavoring  to  have  the 
wrong  corrected  by  other  methods. 

The  wisdom  of  this  policy  was  forcibly  exemplified  in  the  case 
of  the  Walsh  bank.  Had  the  Comptroller  instituted  a  suit  to 
forfeit  the  charter  of  the  Chicago  National  Bank  when  it  became 
known  to  him  that  the  law  had  been  violated,  a  receiver  would 
have  been  the  result,  as  a  run  would  have  been  started  on  the  bank 
as  soon  as  it  became  known  that  such  a  suit  had  been  entered,  and 
in  order  to  protect  the  interests  of  all  depositors  alike  and  pre- 
vent a  preference  of  one  creditor  over  another  it  would  have  been 
necessary  for  the  Comptroller  to  have  appointed  a  receiver  for 
the  institution  even  before  the  suit  to  forfeit  the  charter  of  the 
association  could  have  been  heard  and  determined.  The  closing 
of  this  bank  would  have  been  followed  immediately  by  the  closing 
of  the  two  State  institutions,  and  three  receiverships  would  have 
been  necessary;  the  assets  of  the  three  institutions  would  have 
depreciated  in  value  and  the  creditors,  instead  of  receiving  pay- 
ment in  full  and  without  any  material  delay,  would  have  had  to 
await  the  receipt  of  their  deposits  through  the  slow  process  of 
installment  dividends  from  the  respective  receivers,  extending  over 
a  period  of  several  years,  and  undoubtedly  other  business  failures 
would  have  followed,  or  at  least  serious  embarrassments  would 
have  been  occasioned  in  consequence  of  the  large  amount  of  money 
that  would  have  been  tied  up  indefinitely  in  the  three  banking 
institutions. 

All  three  difficulties  were  avoided,  however,  by  the  wise  course 
pursued  by  the  Comptroller,  aided  by  the  clearing  house  banks. 
All  of  the  creditors  of  the  three  institutions  were  paid  in  full 


260  ROMANCE  AND  TRAGEDY  OF  BANKING 

without  delay,  and  no  serious  consequences  or  embarrassments 
were  experienced. 

The  Chicago  National  Bank  was  placed  in  liquidation  by  reso- 
lution of  its  shareholders  adopted  August  12,  1913,  to  take  effect 
on  the  fifteenth  of  the  same  month.  The  associated  banks  which 
assumed  its  liabilities  to  depositors  and  took  over  a  portion  of  its 
assets  in  payment  therefor,  returned  to  the  bank  in  1907  the 
remaining  assets,  amounting  in  value  to  about  $168,000,  from 
which  the  board  of  directors  declared  a  dividend  to  the  stock- 
holders of  $15  per  share. 

John  R.  Walsh,  the  president  of  the  bank,  and  the  controlling 
spirit  in  the  three  affiliated  banking  institutions,  was  indicted  for 
misapplication  of  the  funds  of  the  national  association  and  other 
violations  of  law.  He  was  placed  on  trial  in  November,  1907,  and 
was  found  guilty  January  19,  1908.  Every  legal  means  known  to 
his  counsel  was  resorted  to  to  have  the  verdict  set  aside.  Appeal 
was  made  to  the  higher  court  and  finally  to  the  Supreme  Court  of 
the  United  States,  consuming  nearly  two  years,  but  without  avail. 
He  was  then  sentenced  to  serve  a  term  of  five  years  and  entered 
the  Leavenworth  penitentiary  in  January,  1910.  After  being 
incarcerated  for  about  a  year  and  nine  months,  through  the 
efforts  of  his  friends  he  was  paroled  on  account  of  failing  health, 
and  died  in  Chicago,  October  23,  1911,  nine  days  after  his  release 
from  prison,  at  the  age  of  seventy-four  years. 

The  Bigelow  Defalcation 

On  April  24,  1906,  the  Comptroller's  office  was  startled  by  the 
receipt  of  a  telegram  from  Milwaukee,  Wis.,  stating  that  Frank 
G.  Bigelow,  the  president  of  the  First  National  Bank  of  Mil- 
waukee, was  a  defaulter  to  the  extent  of  one  million  four  hundred 
and  fifty  thousand  dollars,  an  amount  in  excess  of  the  combined 
capital,  surplus  and  profits  of  the  bank. 

Bigelow  had  been  president  of  the  American  Bankers'  Asso- 
ciation, was  widely  known  among  the  bankers  of  the  country,  and 
had  been  prominent  and  active  in  every  movement  affecting  bank- 
ing and  financial  interests. 


ROMANCE  AND  TRAGEDY  OF  BANKING  261 

When  the  shortage  was  discovered,  a  meeting  of  the  board  of 
directors  of  the  bank  was  called,  at  which  Mr.  Bigelow  was  pres- 
ent. When  confronted  with  the  accusation  against  him  he  calmly 
informed  the  directors  that  he  had  a  painful  confession  to  make 
to  them  and  admitted  that  he  had  misappropriated  the  funds  of 
the  association.  An  examination  of  the  books  of  the  bank,  he 
stated,  would  show  that  he  owed  the  institution  nearly  a  million 
and  a  half  dollars.  The  money,  he  said,  had  been  lost  in  specula- 
tion in  wheat  and  stocks,  that  none  of  it  could  be  recovered,  and 
all  that  he  could  offer  the  bank  in  return  for  the  loss  was  personal 
securities  of  the  value  of  about  three  hundred  thousand  dollars. 

At  first  some  of  the  directors  of  the  bank  were  disposed  to 
make  good  the  loss  and  conceal  the  defalcation  from  the  public, 
through  fear  of  the  effect  of  the  disclosures  upon  the  bank,  but 
after  deliberation  they  finally  concluded,  for  the  protection  of  the 
depositors,  to  make  up  the  shortage  and  report  the  defalcation  to 
the  Federal  authorities.  A  resolution  was  therefore  adopted  by 
the  board  removing  Bigelow  from  the  presidency  of  the  bank,  and 
a  warrant  was  sworn  out  for  his  arrest. 

There  was  nothing  novel  in  Bigelow's  method  of  concealment 
of  his  large  shortage.  He  manipulated  the  accounts  with  corre- 
spondent banks  and  with  approved  reserve  agents.  The  collection 
accounts  and  balances  with  reserve  agents  were  made  to  appear 
several  hundred  thousand  dollars  larger  than  they  were.  The 
defalcation  was  discovered  not  by  the  bank  examiner,  nor  by  any 
officer  or  director  of  the  bank,  but  by  an  employee,  whose  suspi- 
cions were  aroused  by  some  questionable  entries  in  the  books,  and 
he  communicated  his  suspicions  to  one  of  the  directors.  An  inves- 
tigation was  immediately  instituted,  which  led  to  a  discovery  of 
the  shortage  and  the  confession  of  Bigelow. 

When  the  amount  of  the  defalcation  was  ascertained,  the 
directors  heroically  came  to  the  relief  of  the  bank  and  the  protec- 
tion of  its  depositors  by  immediately  signing  an  agreement  pledg- 
ing themselves  to  advance  and  pay  to  the  bank  the  sums  set  oppo- 
site their  names,  as  it  might  be  needed  for  the  payment  of  depos- 
itors. The  respective  sums  subscribed  by  each  director  varied  in 
amount  from  ten  thousand  to  six  hundred  thousand  dollars,  and 
aggregated  one  million  six  hundred  and  thirty-five  thousand. 


262  ROMANCE  AND  TRAGEDY  OF  BANKING 

Before  the  news  of  the  defalcation  was  made  public,  the  direc- 
tors secured  from  Chicago  one  million  dollars,  thus  fortifying  the 
bank  against  a  run  and  saving  the  institution  from  suspension.  A 
run,  however,  was  started  as  soon  as  the  shortage  became  known, 
not  only  on  this  bank  but  upon  other  banks  in  Milwaukee,  and  in 
about  two  hours'  time  nearly  a  million  dollars  was  withdrawn  from 
the  First  National.  At  the  same  time,  while  there  was  a  long  line 
of  depositors  at  the  paying  teller's  window  withdrawing  their 
money,  many  friends  of  the  institution  manifested  their  confidence 
in  its  officers  and  the  solvency  of  the  bank  by  making  deposits  at 
the  receiving  teller's  window. 

Bigelow  at  one  time  was  rated  a  millionaire.  He  was  promi- 
nent in  business  and  social  affairs  in  Milwaukee,  and  was  a  mem- 
ber of  several  clubs  and  civic  organizations.  He  freely  admitted 
his  defalcation  when  confronted,  offered  no  apology  for  his 
wrongdoings,  and  was  sentenced  to  and  served  a  term  in  the 
penitentiary. 

Culpability  of  the  Bank  Examiner 

The  failure  of  the  bank  examiner  to  discover  this  shortage  was 
the  subject  of  considerable  public  criticism.  He  was  summoned 
to  Washington  by  the  Comptroller  and  instructed  to  bring  with 
him  all  of  the  verification  returns  covering  his  several  examina- 
tions of  this  bank,  as  it  was  not  understood  why  this  shortage  was 
not  discovered,  if  bank  balances  had  been  properly  verified.  These 
returns  showed  a  number  of  discrepancies  in  the  accounts  of  cor- 
respondent and  reserve  banks,  and  an  attempt  to  reconcile  any 
one  of  them  would  have  led  to  a  detection  of  the  shortage.  When 
asked  for  an  explanation  as  to  why  he  neglected  to  reconcile  these 
differences,  the  examiner  stated  that  he  relied  upon  his  assistant 
to  do  that  work  for  him,  and  that  his  instructions  to  him  were 
that  if  he  found  any  differences  in  the  returns  to  call  his  attention 
to  them  and  to  file  all  others.  He  stated  that  his  clerk  had  neg- 
lected to  perform  this  duty  and  that  when  the  defalcation  was 
discovered,  and  the  manner  in  which  it  was  effected  disclosed,  he 
examined  the  verification  returns  of  some  of  the  banks  whose 
accounts  were  reported  to  have  been  manipulated  and  learned  for 


CASSIE  CHADWICK 

Copied  from  an  original  photograph  made  about  1897,  and  secured 

through  the  courtesy  of  C.  A.  Farnesworth  of  the 

Union  Trust  Co.,  Cleveland 


ROMANCE  AND  TRAGEDY  OF  BANKING  263 

the  first  time  of  these  discrepancies,  and  that  his  clerk  had  not 
brought  them  to  his  attention,  but  filed  them  away  without  exami- 
nation. The  Comptroller,  however,  held  the  examiner  responsible 
for  the  negligence  of  his  irresponsible  clerk  and  required  him  to 
tender  his  resignation. 

Bank  Failures  During  Mr.  Ridgely's  Administration 

During  Mr.  Ridgely's  administration  eighty-three  national 
banks  were  placed  in  the  hands  of  receivers. 

The  most  sensational  of  these  failures  was  that  of  The  Citizens 
National  Bank  of  Oberlin,  Ohio,  which  suspended  November  28, 
1904.  This  was  not  a  large  bank.  Its  capital  stock  was  only 
sixty  thousand  dollars,  and  its  deposits  a  little  over  four  hundred 
thousand  dollars,  but  for  absolute  imbecility  of  management  it 
perhaps  has  no  parallel  in  the  history  of  national  bank  failures. 
This  bank  was  wrecked  by  a  woman,  the  celebrated  Cassie  A.  Chad- 
wick,  a  female  Napoleon  of  finance,  who  succeeded  in  completely 
deceiving  not  only  the  officers  of  the  bank  as  to  her  financial 
worth  but  every  one  else  with  whom  she  had  any  business  dealings. 

The  wrecking  of  this  institution  and  the  pathetic  end  of  its 
aged  president  was  due  to  his  having  violated  the  law  to  a  small 
extent  in  the  first  instance  by  making  a  loan  of  $13,000  to  this 
woman,  which  was  $7,000  in  excess  of  the  limit  of  a  loan  that  this 
bank  could  lawfully  make.  This  loan  was  negotiated  for  her  by 
two  individuals  whom  the  president  of  the  bank  knew,  who  repre- 
sented to  him  that  they  were  engaged  in  a  deal  with  Mrs.  Chad- 
wick,  involving  the  sum  of  thirty  thousand  dollars,  and  that  they 
had  in  their  possession  gilt-edged  collateral  to  amply  secure  the 
loan.  Relying  upon  their  representations,  and  without  seeing  or 
obtaining  possession  of  the  securities,  the  president  of  the  bank 
made  the  loan.  This  loan  was  paid  at  maturity  and  its  prompt 
payment  paved  the  way  to  the  greater  extension  of  credit  which 
followed.  This  woman  had  more  or  less  business  dealings  with 
the  president  of  the  bank  and  the  cashier  personally  from  that 
time  on  until  about  August,  1903,  when  she  applied  for  a  loan  of 
eighty  thousand  dollars.  In  the  meantime  she  appeared  to  have 
satisfied  the  president  that  she  was  the  owner  in  equity  of  five 


264  ROMANCE  AND  TRAGEDY  OF  BANKING 

million  dollars  of  United  States  Steel  five  per  cent,  gold  bonds, 
with  the  right  of  the  income  therefrom.  She  produced  docu- 
mentary evidence  showing  that  she  was  the  owner  of  bonds,  stocks 
and  other  securities  in  the  hands  of  a  prominent  and  wealthy 
citizen  of  Pittsburg,  no  less  a  personage  than  Mr.  Andrew  Car- 
negie, as  trustee,  to  the  amount  of  over  ten  millions  of  dollars. 
These  documents  were  in  legal  form,  neatly  prepared  and  bore 
every  evidence  of  being  genuine,  even  to  the  signature  of  Mr. 
Carnegie  and  others. 

This  loan  of  eighty  thousand  dollars  was  made  and  was  sub- 
sequently increased  to  ninety-three  thousand  dollars  to  cover  in- 
terest and  charges,  solely  upon  the  confidence  of  the  president  of 
the  bank  in  the  truth  of  Mrs.  Chadwick's  representations. 

When  the  president  of  the  bank  found  that  the  loan  was  liable 
to  run  for  some  time  he  bethought  himself  of  security,  and  ob- 
tained from  Mrs.  Chadwick  an  assignment  of  two  hundred  and 
thirty  thousand  dollars  of  the  steel  bonds,  with  power  of  attorney 
attached  and  a  statement  from  a  prominent  banker  in  a  nearby 
city  that  he  held  in  trust  for  her  securities  to  the  amount  of  three 
million  dollars  free  of  any  lien  whatever.  She  also  exhibited  to 
the  president  of  the  bank  a  will  which  she  had  prepared,  making 
him  the  executor  of  her  estate,  in  which  all  her  securities  were 
listed  and  described. 

Subsequently  she  obtained  additional  loans  from  the  bank, 
ranging  in  amount  from  four  to  thirty-five  thousand  dollars, 
which  she  claimed  was  necessary  for  her  to  have  temporarily  to 
satisfy  pressing  creditors,  pending  a  settlement  of  her  liabilities 
in  full.  Finally  she  made  an  assignment  of  her  alleged  five  millions 
of  securities  in  the  hands  of  her  trustees  to  the  president  of  the 
bank,  individually,  canceling  the  previous  assignment  to  the  bank 
of  two  hundred  and  fifty  thousand  dollars,  which  latter  assign- 
ment was  surrendered  to  her. 

The  next  move  of  this  supposedly  wealthy  adventuress  was  to 
send  by  mail  to  her  dupe,  the  president  of  the  Oberlin  bank,  a 
check  on  a  trust  company  in  New  York  City  for  eleven  thousand 
dollars,  with  a  request  for  a  New  York  draft  in  exchange.  Her 
request  was  promptly  honored,  but  the  check  proved  to  be 
worthless. 


-T^—W 


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Assignment  of  the  #500,000  Forged  Carnegie  Note 


.S 

s  .        t^xr 


of    C*C**£j4j*->    <<>.    ^&& 


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BOGUS  TRUST  AGREEMENT 
Used  by  Cassie  Chadwick  m  her  borrowing  operations 


*^<-A—  -. 

(7 


BOGUS  TRUST  AGREEMENT 
Continuation,  showing  signature  of  Andrew  Carnegie  forged  by  Cassie  Chadwick 


Assignment  of  the  $250,000  Forged  Carnegie  Note 


ROMANCE  AND  TRAGEDY  OF  BANKING  265 

Her  next  deal  with  the  Oberlin  bank  was  to  submit  an  offer 
to  the  president  of  a  note  purporting  to  have  been  signed  by  Mr. 
Andrew  Carnegie  for  five  hundred  thousand  dollars  in  exchange 
for  the  assignment  of  the  five  millions  of  securities  which  the  bank 
held.  The  president  of  the  bank  readily  accepted  this  proposi- 
tion, surrendered  the  assignment  and  received  the  Carnegie  note, 
which  he  accepted  without  question  as  being  genuine,  relying 
upon  his  familiarity  with  the  signature  of  Mr.  Carnegie,  which 
he  said  he  had  seen  on  other  papers. 

When  questioned  as  to  how  she  became  possessed  of  so  much 
wealth  and  why  Mr.  Carnegie  gave  her  his  note  for  so  large  a 
sum  of  money,  she  stated  that  she  was  the  illegitimate  child  of 
Mr.  Carnegie,  and  that  he  had  settled  on  her  the  securities  before 
mentioned,  amounting  to  over  ten  millions  of  dollars,  for  the 
purpose  of  righting  the  wrong  occasioned  by  her  birth. 

About  this  time  the  bank  was  due  for  examination  and  the 
examiner  was  likely  to  drop  in  any  day.  The  president  was 
anxious  to  conceal  from  the  examiner  the  large  unlawful  loan  to 
Mrs.  Chadwick,  and  conferred  with  her  in  regard  to  making  some 
arrangement  that  would  pass  the  inspection  of  the  examiner. 
The  resourcefulness  of  Mrs.  Chadwick  was  equal  to  the  emergency. 
She  enlisted  the  interest  of  some  of  her  friends,  who  arranged  to 
negotiate  a  loan  through  a  trust  company,  but  the  board  of 
directors  of  the  company  refused  to  make  the  loan  when  the  ap- 
plication was  brought  to  their  attention. 

The  regular  examination  of  the  bank  was  made  in  April, 
1904.  The  loan  to  Mrs.  Chadwick  then  amounted  to  two  hundred 
and  twenty  thousand  dollars,  and  was  so  reported  by  the  examiner 
to  the  Comptroller,  but  the  examiner  reported  that  while  the  loan 
was  largely  in  excess  of  the  legal  limit  it  was  amply  secured  and 
that  there  was  no  danger  of  the  bank  sustaining  any  loss  thereon ; 
that  he  had  seen  the  security,  and  that  it  fully  protected  the  loan. 
He  reported  this  loan  as  having  been  made  to  C.  A.  Chadwick,  but 
did  not  report  that  C.  A.  Chadwick  was  a  woman,  or  that  the 
security  for  the  loan  was  a  note  of  Andrew  Carnegie.  He  assured 
the  Comptroller  that  arrangements  were  being  made  to  immedi- 
ately reduce  the  loan  to  the  legal  limit  and  that  he  had  insisted 
upon  this  being  done. 


266          ROMANCE  AND  TRAGEDY  OF  BANKING 

Had  this  examiner  advised  the  Comptroller  that  the  recipient 
of  this  large  loan  was  a  woman  and  that  the  security  consisted 
of  a  note  of  Andrew  Carnegie,  the  Comptroller  would  have  been 
put  on  his  inquiry  in  regard  to  this  woman  and  why  Andrew  Car- 
negie had  executed  his  note  to  her  for  such  a  large  sum  of  money, 
as  Mr.  Carnegie  was  not  in  the  habit  of  having  his  notes  in  na- 
tional banks. 

At  the  time  of  the  previous  examination  of  this  bank  the  loan 
was  concealed  from  the  examiner  by  a  temporary  loan  negotiated 
by  the  president  which  was  paid  immediately  after  the  examina- 
tion. 

In  the  meantime,  while  the  president  of  the  bank  seems  to 
have  become  alarmed  over  this  large  liability  and  appears  to  have 
made  strenuous  efforts  to  secure  the  payment  or  reduction  of  the 
loan,  he  continued  to  make  further  advances  and  when  the  bank 
failed  Mrs.  Chadwick  was  liable  to  the  association  for  two  hun- 
dred and  fifty  thousand  dollars,  or  over  four  times  the  amount 
of  the  capital  stock  of  the  association. 

The  credulous  president  of  the  bank  apparently  was  com- 
pletely hypnotized  by  this  woman  and  not  only  freely  loaned  to 
her  the  funds  of  the  institution  but  made  her  liberal  advances  from 
his  personal  resources.  So  complete  was  his  confidence  in  her 
honesty  and  her  financial  ability  to  fully  discharge  her  obligations 
to  the  bank  and  to  himself  that  for  several  days  after  the  bank 
failed  he  still  believed  and  maintained  that  she  would  come  forward 
and  meet  her  obligations. 

After  the  failure  of  the  association  and  the  sensational  dis- 
closures which  followed,  the  antecedents  of  this  woman  were  thor- 
oughly investigated  and  exposed,  and  while  much  that  was  then 
written  of  her  history  was  no  doubt  untrue,  or  at  least  greatly  ex- 
aggerated, according  to  the  statements  published  at  that  time  it 
appears  that  her  maiden  name  was  Elizabeth  Bigley,  and  that  she 
was  born  at  or  near  Woodstock,  Canada.  She  was  reported  to 
have  been  indicted  in  her  younger  days  for  forgery,  but  on  trial 
was  acquitted  on  the  ground  that  she  was  mentally  unsound  at 
the  time  she  committed  the  act.  Later  she  was  known  as  Mrs. 
Hoover,  having  married  one  C.  L.  Hoover,  a  resident  of  Cleve- 
land, Ohio,  who  was  many  years  her  senior.  She  was  next  known 


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0V  '  '  <  •///<  <  <  c-kjivt  .'*l4*0'  '  ^    /?<•>-''      • 

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'#///*  S/f/f/'fs/ 


Forged  Carnegie  Note  for  ^500,000,  and  Indorsements 


ROMANCE  AND  TRAGEDY  OF  BANKING  267 

as  Madam  De  Vere,  a  clairvoyant,  who  formerly  resided  at 
Toledo,  Ohio,  and  who  had  served  a  term  of  nine  and  one-half 
years  in  the  Ohio  penitentiary  for  forgery. 

After  her  release  from  the  penitentiary  she  is  reported  to 
have  married  a  Dr.  Chadwick,  of  Cleveland,  and  subsequently  to 
have  begun  her  career  as  a  financier.  Her  method  of  operation 
seemed  to  be  of  the  endless  chain  variety,  borrowing  from  one 
creditor  to  pay  another  and  by  promptly  meeting  her  obligations 
in  this  manner  at  maturity  she  acquired  a  financial  standing  and 
credit  which  enabled  her  to  maintain  and  enlarge  the  scope  of  her 
operations  until  the  end  of  the  chain  was  reached  in  the  collapse 
of  The  Citizens  National  Bank  of  Oberlin. 

The  reputed  wealth  on  which  she  based  her  operations  and 
secured  credit  consisted  of  the  following  so-called  securities,  bear- 
ing the  alleged  signature  of  Andrew  Carnegie: 

Two  notes  held  by  The  Citizens  National  Bank  of  Oberlin  for 
$500,000  and  $250,000  respectively. 

One  note  for  $500,000. 

A  certificate  for  $5,000,000. 

A  certificate  of  trusteeship  for  securities  held  by  a  trust  com- 
pany in  Cleveland  for  $7,500,000,  making  a  total  of  $13,750,000. 
all  of  which  proved  to  be  forgeries. 

At  the  time  of  her  dealings  with  the  Citizens  National  Bank 
of  Oberlin,  she  lived  at  Cleveland,  Ohio.  Her  home,  it  was  stated, 
was  furnished  elaborately,  but  displayed  no  special  taste.  Her 
parlors  were  filled  with  carvings,  statuettes  and  ornaments  im- 
ported from  Europe,  and  numerous  paintings  adorned  the  walls, 
giving  the  interior  of  her  home  the  appearance  of  wealth,  but  the 
furnishings  appear  to  have  been  selected  without  discrimination 
or  any  definite  plan  of  arrangement. 

After  the  failure  of  the  bank  she  was  indicted,  tried  at  Cleve- 
land and  convicted  for  defrauding  the  institution  and  was  sen- 
tenced for  a  term  of  years  to  the  same  penitentiary  in  which 
Madam  De  Vere  had  been  confined  years  before,  where  she  died 
while  serving  sentence. 

Thus  closed  the  career  of  probably  the  most  notorious  and 
successful  bank  swindler  known  in  the  annals  of  the  national  bank- 
ing system. 


268  ROMANCE  AND  TRAGEDY  OF  BANKING 

The  deluded  president  of  the  wrecked  bank  died  before  Mrs. 
Chadwick's  trial  and  conviction,  a  victim  of  his  own  folly,  caught 
in  the  meshes  spread  for  him  through  his  violation  of  the  banking 
laws  and  the  sacred  obligation  of  his  oath  of  office.  The  first 
false  step  in  his  dealings  with  Mrs.  Chadwick  was  in  making  the 
original  loan  of  thirteen  thousand  dollars,  which  was  seven  thou- 
sand dollars  in  excess  of  the  legal  limit.  Each  succeeding  increase 
of  credit  was  extended  in  an  effort  to  secure  and  recover  the 
previous  loan,  until  the  aggregate  of  her  liabilities  reached  a  point 
where  the  bank  and  himself  individually  became  hopelessly  in- 
volved, and  the  inevitable  result  followed. 

How  many  bankers  who  have  read  the  story  of  this  failure  and 
the  causes  which  led  to  it,  will  profit  by  the  lesson  it  teaches? 
Every  president,  and  every  cashier  who  is  a  director  of  a  national 
bank,  is  required  by  law  to  take  and  subscribe  to  an  oath  that  he 
will  not  knowingly  violate  or  willingly  permit  to  be  violated  any 
of  the  provisions  of  the  national  banking  laws.  The  president  of 
The  Citizens  National  Bank  of  Oberlin  subscribed  to  this  oath  and 
his  violation  of  it  brought  disaster  upon  his  institution,  loss  to 
his  depositors  and  stockholders,  and  financial  ruin  and  dishonor 
to  himself. 

There  are  presidents  and  cashiers  of  national  banks  who, 
while  scrupulously  honest  in  all  their  business  dealings  with  their 
fellow  men  and  religiously  true  to  every  trust  reposed  in  them, 
deliberately  violate  their  oaths  of  office  with  apparently  no  more 
compunction  of  conscience  than  had  the  president  of  the  Oberlin 
bank.  How  such  men  reconcile  themselves  with  their  consciences 
it  is  difficult  to  imagine. 

Bank  failures  that  have  not  been  due  to  violations  of  law  are 
very  rare,  and  if  every  officer  and  director  of  a  bank  should  be 
true  to  his  oath  of  office,  temporary  suspensions  occasionally 
might  become  necessary  under  extraordinary  conditions,  but  in- 
solvency would  not  intervene,  and  the  creditors  and  stockholders 
would  not  suffer  loss.  Because,  if  the  officers  and  directors  of 
the  bank  restrict  the  loans  to  any  one  individual  or  interest  to 
the  limit  fixed  by  law,  and  do  not  undertake  to  circumvent  its  re- 
strictions by  indirect  methods,  the  loss  upon  any  single  loan 
would  not  be  sufficient  to  seriously  affect  the  bank  or  impair  its 


ROMANCE  AND  TRAGEDY  OF  BANKING  269 

solvency.  It  is  the  excessive  loan,  no  matter  in  what  form  it  may 
be  made,  that  does  the  damage,  and  no  officer  or  director  can 
make  such  a  loan,  directly  or  indirectly,  without  violating  his 
oath  of  office  and  inviting  the  consequences  that  follow. 

Obligations  of  Directors 

On  one  occasion  a  prominent  member  of  Congress,  who  was 
at  that  time  president  of  a  national  bank,  called  at  the  Comp- 
troller's office  for  a  conference  in  regard  to  several  excessive  loans 
that  had  been  made  by  his  bank  with  his  knowledge  and  consent. 
These  loans  had  been  freely  criticised  by  the  Comptroller  and 
their  reduction  to  the  legal  limit  was  insisted  upon.  He  took 
exception  to  the  criticisms  on  the  ground  that  the  loans  were  con- 
sidered perfectly  safe,  as  all  such  loans  are  claimed  to  be,  and  in 
addition  were  well  secured.  He  contended  that  they  were  the 
very  best  loans  in  the  bank  and  that  it  was  necessary  for  his 
bank  to  extend  the  accommodation  in  order  to  retain  the  business 
of  these  customers.  The  attention  of  this  law  maker  was  called 
to  the  fact  that  following  his  election  as  a  director  each  year  he 
had  taken  an  oath  that  he  would  not  violate  or  knowingly  permit 
to  be  violated  any  of  the  provisions  of  the  national  banking  laws. 
He  admitted  that  these  loans  exceeded  the  legal  limit  and  that 
they  were  made  in  violation  of  law  with  his  knowledge  and 
approval,  and  in  answer  to  an  inquiry  as  to  how  he  reconciled 
himself  with  his  conscience  in  thus  deliberately  violating  the  law, 
he  replied,  after  some  hesitation,  that  "he  had  not  considered  the 
matter  in  that  light  before."  He  was  told  that  Congress  made 
the  laws  and  that  it  was  the  sworn  duty  of  the  Comptroller  to 
enforce  an  observance  of  them  without  exception,  and  that  the 
Comptroller  had  no  power  to  waive  a  provision  of  the  statute  or 
to  relieve  or  absolve  him  from  the  obligation  of  his  oath  of  office. 
He  finally  declared  that  he  would  have  the  loans  reduced  to  the 
limit  and  that  thereafter  while  he  was  president  of  the  bank  he 
would  not  make  or  permit  to  be  made  any  loan  in  excess  of  the 
legal  limit. 

This  incident  is  related  simply  to  illustrate  the  conception 
that  some  officers  of  banks  have  of  the  obligation  they  assume, 


270  ROMANCE  AND  TRAGEDY  OF  BANKING 

morally  and  legally,  when  they  swear  once  each  year  that  they 
will  not  wilfully  violate  or  knowingly  permit  to  be  violated  any 
of  the  provisions  of  the  national  banking  laws.  Unfortunately, 
they  are  not  all  as  scrupulously  honest  in  this  respect  as  the 
director  referred  to,  or  as  the  Quaker  directors  of  a  national 
bank  in  Pennsylvania,  who  qualified  their  affirmation  not  to  vio- 
late the  law  by  adding  the  words  "except  as  to  the  limit  of  loans." 

Arthur  B.  Spear,  cashier  of  the  Oberlin  bank,  was  indicted 
and  convicted  for  making  false  entries  in  the  books  of  the  asso- 
ciation for  the  purpose  of  deceiving  the  bank  examiner  and  the 
Comptroller.  Spear  certified  that  according  to  the  records  of 
the  bank  Mrs.  Chadwick  had  a  certain  deposit  in  the  bank  when 
the  fact  was  she  did  not  have  any.  It  was  alleged  at  the  trial 
of  Spear  that  he  made  the  false  entries  by  direction  of  the  presi- 
dent, but  that  he  had  not  profited  in  any  way  by  the  transaction. 
Beckwith,  the  president,  having  died  before  the  trial  of  Spear, 
the  brunt  of  the  affair  fell  upon  the  latter.  He  was  sentenced 
to  the  penitentiary  for  a  term  of  seven  years,  but  his  sentence 
was  commuted  by  the  President  before  completion. 

In  the  liquidation  of  the  bank  under  the  receivership,  the 
losses  on  assets  compounded  or  sold  under  order  of  the  court, 
amounted  to  $246,561.  An  assessment  of  one  hundred  per  cent, 
was  levied  upon  the  stockholders,  of  which  amount  $47,171,  or 
over  seventy-six  per  cent.,  was  collected,  and  seventy-seven  per 
cent,  was  paid  to  the  depositors  and  other  creditors,  amounting 
to  $236,928.41. 

The  receivership  was  finally  closed  June  30,  1913. 

Failures  of  the  National  Bank  of  North  America  and  the 
Amsterdam  National  Bank  of  New  York  City 

The  failures  of  the  National  Bank  of  North  America  and  the 
Amsterdam  National  Bank  of  New  York  City,  which  occurred 
during  the  last  year  of  Mr.  Ridgely's  administration,  while  not 
involving  very  large  interests,  were  of  no  less  importance  because 
of  the  prominence  of  the  parties  concerned  and  the  intimate  rela- 
tion of  these  failures  to  the  panic  of  1907. 


ROMANCE  AND  TRAGEDY  OF  BANKING  271 

These  banks  were  not  large  institutions,  measured  by  the 
standard  of  what  constitutes  largeness  in  New  York  City,  and 
neither  bank  was  insolvent  when  it  was  closed. 

The  capital  of  the  National  Bank  of  North  America  was 
$2,000,000.  Its  deposits  amounted  to  $6,890,000,  and  its  total 
liabilities  to  $13,326,000.  It  was  placed  in  the  hands  of  a  receiver 
by  the  Comptroller  on  January  27,  1908,  after  the  adoption  of 
a  resolution  by  its  board  of  directors  requesting  him  to  make  an 
examination  of  the  bank,  and  to  take  temporary  charge  of  its 
affairs,  if,  in  his  judgment,  the  situation  warranted  such  action. 

This  resolution  of  the  directors  was  not  adopted  because  of 
any  belief  on  their  part  that  the  bank  was  insolvent.  But  on 
account  of  the  extreme  difficulty  experienced  in  realizing  on  the 
assets  rapidly  enough  to  enable  them  to  meet  the  demands  of 
depositors,  which  had  been  very  heavy  and  persistent  during  the 
several  previous  days,  and  the  fear  of  further  large  withdrawals, 
they  deemed  it  best  in  the  interests  of  the  association  to  tempo- 
rarily suspend  operations  and  thus  prevent  a  sacrifice  of  the 
assets,  which  otherwise  would  have  been  necessary,  as  the  Clearing 
House  Association  had  refused  to  extend  to  the  bank  any  further 
assistance. 

The  persistent  run  upon  this  institution  which  necessitated 
its  suspension  was  due  wholly  to  a  lack  of  confidence  in  the  man- 
agement, of  which  Charles  W.  Morse  was  the  controlling  factor. 
Morse  was  known  to  be  intimately  associated  with  F.  Augustus 
Heinze,  who  at  that  time  was  very  much  in  the  public  eye,  having 
acquired  an  unenviable  reputation  in  connection  with  his  pro- 
longed contest  with  the  Standard  Oil  Company  in  Montana  over 
a  deal  in  Amalgamated  Copper.  He  had  been  accused  of  having 
manipulated  the  courts  and  the  Legislature  of  that  State  in  his 
own  interests,  and  of  other  dishonorable  transactions  in  mining 
and  banking,  and  Thomas  W.  Lawson  made  him  the  object  of 
criticism  in  his  articles  on  "Frenzied  Finance."  Morse,  Hcin/c 
and  their  associates  had  the  reputation  of  being  speculators,  or, 
at  least,  of  being  engaged  in  operations  of  very  questionable 
merit.  They  jointly  owned  or  controlled  a  number  of  small  bank- 
ing institutions  in  New  York,  National  and  State.  It  was 
assumed,  as  a  matter  of  course,  that  the  speculative  operations 


272  ROMANCE  AND  TRAGEDY  OF  BANKING 

in  which  they  were  known  to  be  engaged,  were  being  financed  by 
these  banks,  and  this  suspicion  was  not  calculated  to  inspire  con- 
fidence in  the  management  of  the  banks  or  in  the  stability  of  the 
institutions  with  which  they  were  connected.  Consequently,  on 
the  first  indication  of  a  financial  disturbance,  these  institutions 
were  the  object  of  distrust  and  attack,  and  the  panic  of  1907 
forced  them  to  succumb. 

That  the  National  Bank  of  North  America  was  not  insolvent 
when  it  was  closed  was  fully  demonstrated  by  the  rapid  liquida- 
tion of  its  affairs  under  the  receivership.  Its  creditors  were  paid 
in  full  with  interest  from  the  date  of  closing,  and  cash  and  assets 
amounting  to  $2,387,750  were  returned  to  the  stockholders.  The 
receivership  was  finally  closed  October  31,  1908,  within  eight 
months  from  the  date  of  suspension. 

New  Amsterdam  National  Bank 

The  New  Amsterdam  National  Bank  was  closed  under  similar 
circumstances  and  liquidated  with  like  results.  The  capital  of 
this  association  was  $1,000,000,  its  deposits  $3,269,000,  and  its 
total  liabilities  $5,984,000.  The  bank  was  not  insolvent  when  it 
was  closed.  This  institution  was  known  as  the  theatrical  bank 
of  New  York  City.  Its  depositors  and  customers  consisted  largely 
of  actors,  race  track  men,  gamblers,  saloon-keepers  and  sports- 
men. The  bank  was  placed  in  the  hands  of  a  receiver  January  30, 
1908.  Its  depositors  were  paid  in  full  with  interest  from  the 
date  of  closing,  and  the  receivership  was  finally  terminated 
April  14,  1909,  after  turning  over  to  an  agent  of  the  stockholders 
cash  and  assets  amounting  to  $1,027,612. 

After  the  elimination  of  F.  Augustus  Heinze  from  the  Mer- 
cantile National  Bank  and  the  closing  of  the  National  Bank  of 
North  America  and  the  New  Amsterdam  National  Bank,  the 
Federal  authorities  at  Washington  put  expert  accountants  on 
the  books  of  these  three  institutions  for  the  purpose  of  ascer- 
taining whether  any  criminal  violations  of  law  had  been  com- 
mitted by  Heinze,  Morse  and  others  in  connection  with  their 
management  of  these  banks.  As  a  result  of  these  investigations 
Heinze  and  Morse  were  indicted  by  the  Federal  Grand  Jury  for 


ROMANCE  AND  TRAGEDY  OF  BANKING  273 

misapplication  of  the  funds  of  the  Mercantile  National  Bank 
and  falsification  of  the  books  of  the  National  Bank  of  North 
America  in  connection  with  certain  loans  made  upon  the  stock 
of  the  American  Ice  Company,  a  Morse  concern.  Morse  was 
tried  first.  His  trial  covered  a  period  of  several  weeks,  and 
resulted  in  a  verdict  of  guilty.  He  subsequently  resorted  to  every 
known  means  and  legal  technicality  to  secure  a  new  trial,  but 
without  avail,  and  was  finally  sentenced  to  a  term  of  fifteen  years 
in  the  penitentiary  at  Atlanta,  Ga.  After  serving  about  two  and 
a  half  years  of  his  sentence,  Morse  was  pardoned  by  President 
Taft  because  of  failing  health,  it  having  been  represented  to  him, 
and  substantiated  by  medical  experts  after  an  examination,  that 
he  would  live  but  a  few  months  if  his  incarceration  in  prison  were 
continued. 

Heinze  was  more  fortunate.  He  was  tried  some  months  later 
and  acquitted.  The  original  indictment  of  Heinze  in  1909  con- 
tained a  number  of  counts,  many  of  which  were  stricken  out  by 
the  court  on  the  trial  of  the  case  upon  technical  grounds.  The 
court  held  that  the  indictment  charging  misapplication  of  the 
funds  of  the  Mercantile  National  Bank  was  defective  because  it 
did  not  charge  conversion  of  such  funds,  and  that  the  word  "con- 
version" was  necessary  as  supplying  the  legal  measure,  which  the 
court  was  unable  to  find  in  the  indictment  for  "willful  mis- 
application." 

In  1910  Heinze  was  again  indicted  on  practically  the  same 
charge,  the  indictment  alleging  that  the  purpose  of  the  misap- 
plication of  the  funds  of  the  bank  was  to  inflate  the  stock  of  the 
United  Copper  Company.  The  indictment  was  again  found  to 
be  faulty  and  was  quashed.  The  Government  then  appealed  from 
the  decision  of  the  court  to  the  Supreme  Court  of  the  United 
States,  under  the  Act  of  Congress  of  March  2,  1907,  authorizing 
an  appeal  by  the  Government  in  criminal  cases  involving  points 
of  law.  On  December  5,  1910,  the  Supreme  Court  reversed  the 
decision  of  the  United  States  Circuit  Court  of  New  York  and 
held  that  the  various  counts  in  the  indictments  referred  to  charg- 
ing Heinze  with  misapplication  of  the  funds  of  the  bank  were 
sufficient.  But  as  the  transactions  covered  by  the  indictments  on 
which  the  Supreme  Court  ruled  were  practically  the  same  as  those 


274  ROMANCE  AND  TRAGEDY  OF  BANKING 

covered  by  the  indictment  on  which  Heinze  was  tried  and 
acquitted  during  the  previous  spring,  no  further  action  was  taken 
by  the  Government,  and  Heinze  escaped  punishment. 

The  Farmers  and  Drovers  National  Bank  of  Waynesburg,  Pa. 

The  Farmers  and  Drovers  National  Bank  was  placed  in  the 
hands  of  a  receiver  on  December  12,  1906.  This  was  a  very  old 
and  reputable  institution.  It  was  originally  organized  in  1835, 
and  became  a  national  association  on  February  25,  1865.  Before 
its  conversion  into  the  national  system  it  had  the  reputation  of 
having  been  a  strong,  successful  and  conservatively  managed 
institution.  The  capital  of  this  bank  was  $200,000  and  its 
deposits  were  nearly  $500,000.  It  was  not  a  large  bank,  but 
for  rascality  of  management  it  has  not  been  surpassed. 

For  some  time  before  its  failure  it  was  known  by  the  Comp- 
troller's office  to  have  been  freely  rediscounting  its  bills  receiv- 
ables and  otherwise  borrowing  money.  The  national  banking  laws 
limited  the  liabilities  of  a  bank  for  borrowed  money  to  an  amount 
not  exceeding  the  capital  stock  of  the  association.  When  the 
reports  of  the  bank  examiner  showed  that  the  liabilities  of  this 
bank  of  the  nature  indicated  largely  exceeded  the  capital  of  the 
association,  strenuous  measures  were  resorted  to  to  secure  a 
reduction  of  the  amount  to  at  least  the  legal  limit.  There  was 
no  evidence  furnished  or  obtainable  upon  which  to  base  a  sus- 
picion that  the  bank  was  insolvent,  and  without  such  evidence, 
or  well-grounded  suspicion,  the  Comptroller  had  no  authority 
under  the  law  to  close  and  take  possession  of  the  association. 
The  bank  was  practically  in  charge  of  an  examiner  for  some  time 
before  it  was  closed,  for  the  sole  purpose  of  securing  a  reduction 
in  the  large  line  of  rediscounts,  and  it  was  supposed  that  reason- 
able progress  was  being  made  in  this  connection,  when  it  was 
discovered  that  the  books  of  the  bank  did  not  reflect  its  true 
condition  in  respect  to  the  extent  of  these  liabilities.  The  exam- 
iner was  then  promptly  instructed  to  close  its  doors  pending  a 
thorough  investigation  to  determine  its  true  condition. 

On  November  12,  1906,  the  date  of  the  last  report  of  con- 
dition made  by  the  bank  previous  to  the  date  of  its  closing,  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  275 

notes  and  bills  rediscounted  were  reported  as  $349,4-74.61,  or 
$149,474.61  in  excess  of  the  capital  stock  of  the  association,  and 
the  amount  due  to  banks  and  bankers  was  shown  to  be  only 
$3,674.71. 

Upon  taking  charge  of  the  bank  one  month  later,  the  exam- 
iner who  had  been  appointed  temporary  receiver,  found  that  the 
rediscounts  were  several  hundred  thousand  dollars  greater  than 
the  amount  reported  and  that  the  books  of  the  bank  were  so 
grossly  falsified  as  to  be  wholly  unreliable.  Numerous  notes  were 
presented  to  the  receiver  soon  after  his  appointment,  bearing  the 
endorsement  of  the  Farmers  and  Drovers  National  Bank,  which 
had  been  rediscounted  in  good  faith  by  other  banks,  but  did  not 
appear  as  a  liability  of  the  Waynesburg  bank  upon  its  books. 

Several  months  before  this  bank  was  closed,  information  was 
received  by  the  Comptroller  from  outside  sources  that  the  bank 
was  borrowing  money  freely  and  that  its  published  reports  of 
condition  did  not  correctly  show  these  liabilities.  The  examiner 
was  advised  of  this  fact  and  instructed  to  make  a  thorough 
investigation  of  the  bank's  condition  in  this  respect.  His  exam- 
ination covered  a  period  of  from  twelve  to  fourteen  days.  At 
the  commencement  of  this  examination  the  cashier,  who  was  the 
sole  manager  of  the  bank,  informed  him  that  the  bank  had  no 
liabilities  for  rediscounts  other  than  those  shown  by  its  books. 
During  the  progress  of  this  examination  evidence  was  obtained 
through  the  examination  of  other  banks,  which  completely  refuted 
this  statement  of  the  cashier.  When  he  was  confronted  with  the 
evidence  of  these  rediscounts  and  asked  why  they  did  not  appear 
upon  the  books  of  the  bank,  the  cashier  produced  a  private  book 
which  he  kept  in  his  desk,  the  existence  of  which  was  previously 
unknown  to  the  examiner.  An  examination  of  this  record  showed 
rediscounts  largely  in  excess  of  those  theretofore  discovered  by 
the  examiner,  but  even  this  record  did  not  contain  a  complete  list 
of  such  liabilities.  Outside  investigation  was  continued  by  the 
examiner,  without  any  clue  or  assistance  from  the  cashier,  until 
liabilities  for  rediscounts  were  uncovered  aggregating  the  enor- 
mous sum  of  nearly  $620,000,  not  a  dollar  of  which  appeared 
upon  the  books.  One  of  the  cashier's  plans  of  operation  was 
to  make  a  deposit  with  a  bank,  shift  all  balances  to  that  bank. 


276  ROMANCE  AND  TRAGEDY  OF  BANKING 

then  borrow  from  it  as  much  as  possible,  checking  out  the  account 
and  leaving  an  overdraft. 

When  this  condition  of  affairs  was  discovered  by  the  exam- 
iner he  required  the  cashier  to  give  the  bank  security  in  the  nomi- 
nal value  of  at  least  three  hundred  thousand  dollars  to  cover 
any  losses  on  the  rediscounted  paper,  or  any  liabilitity  of  the 
cashier  individually  resulting  from  his  acts. 

While  the  cashier  was  criminally  liable  under  the  law  for 
falsification  of  the  books  of  the  bank  and  reports  made  to  the 
Comptroller,  there  was  no  evidence  of  insolvency  of  the  associa- 
tion, and  there  was  no  reason  to  believe  at  that  time  that  the 
rediscounted  paper  was  not  collectible.  But  as  the  cashier  was 
found  to  be  wholly  unreliable  and  unsafe,  the  next  and  only 
course  for  the  Comptroller  to  pursue  was  to  demand  his  resig- 
nation or  removal  from  the  bank,  pending  the  presentation  of  the 
evidence  of  criminal  violations  of  law  against  him  to  the  United 
States  Attorney  and  placing  the  bank  in  a  condition  to  with- 
stand the  effect  of  the  disclosures  which  would  follow  his  arrest. 
This  demand  was  promptly  made,  insisted  upon,  and  complied 
with  on  August  27,  1906,  but  was  not  carried  out  in  good  faith 
by  the  directors  of  the  bank,  who,  secretly  and  without  the  knowl- 
edge of  the  examiner  or  the  Comptroller,  elected  him  vice-presi- 
dent of  the  association,  and  continued  him  in  a  position  which 
enabled  him  to  still  carry  on  his  nefarious  operations,  and  it  was 
not  known  by  the  Comptroller  that  this  action  had  been  taken 
by  the  board  until  the  name  of  this  cashier  appeared  as  vice- 
president  in  the  next  report  of  condition  of  the  bank  made  some 
time  later. 

Under  such  a  condition  of  affairs,  with  deception  practiced 
upon  him  at  every  turn,  and  the  records  of  the  bank's  trans- 
actions wholly  unreliable,  it  was  absolutely  impossible  for  the 
examiner  to  determine  the  true  condition  of  this  bank  during  its 
active  existence,  and  it  was  months  after  the  association  had  been 
placed  in  the  hands  of  a  receiver  before  the  extent  of  its  lia- 
bilities on  rediscounted  paper  could  be  definitely  ascertained,  and 
then  only  through  the  slow  process  of  awaiting  the  filing  and 
proving  of  claims  of  creditors. 


ROMANCE  AND  TRAGEDY  OF  BANKING  277 

Many  of  the  notes  found  in  the  bank  were  later  proven  to  be 
forgeries  when  presented  by  the  receiver  for  collection,  and  a 
number  of  those  that  were  genuine  were  claimed  by  the  makers 
to  have  been  paid  at  maturity,  but  were  carelessly  left  in  the 
bank  after  payment,  thus  demonstrating  the  loose  methods  which 
prevailed,  not  only  on  the  part  of  the  bank  in  the  conduct  of 
its  business  but  by  some  of  its  customers  in  their  dealings  with 
the  institution. 

Much  of  the  rediscounted  paper  that  was  not  forged  was  in 
the  names  of  makers  who  were  financially  irresponsible  and  con- 
sequently was  uncollectible. 

As  is  usual  in  such  cases,  the  examiner  and  the  Comptroller 
were  severely  criticised  and  censured  for  not  discovering  during 
the  active  existence  of  this  bank  the  conditions  which  were  dis- 
closed subsequent  to  its  closing,  and  the  Comptroller  was  charged 
with  having  a  knowledge  of  these  facts  for  months  before  he  took 
possession  of  the  association. 

Mr.  Ridgely  was  Comptroller  at  the  time  and  the  criticisms 
referred  to  were  directed  against  him.  It  was  charged  editorially 
by  some  of  the  newspapers  that  the  bank  was  permitted  to  con- 
tinue in  business  long  after  it  was  known  by  the  Comptroller  to 
be  in  a  most  unsatisfactory  condition,  in  order  to  subserve  the 
interests  of  some  of  the  officials  of  the  bank  who  were  candidates 
for  political  office  at  the  approaching  election.  Allegations  of 
this  character  and  of  a  similar  nature  are  usually  without  any 
foundation  in  fact,  and  display  the  ignorance  or  malice  of  those 
responsible  for  them. 

Whenever  a  national  bank  fails,  no  matter  from  what  cause, 
the  examiner  and  the  administrative  officials  charged  with  the 
duty  of  supervising  the  banks  are  criticised  with  more  or  less 
severity  by  the  press  and  the  public  in  general  and  by  the  depos- 
itors and  stockholders  of  the  failed  institution  in  particular. 
The  examiner  is  usually  held  responsible  for  not  promptly  discov- 
ering and  reporting  the  unsatisfactory  conditions  which  led  to 
the  failure,  or  administrative  officials  are  censured  for  undue 
leniency,  while,  as  a  rule,  the  facts  are  that  there  was  neither 
negligence  nor  incompetency  on  the  part  of  the  examiner  nor 
undue  forbearance  on  the  part  of  the  supervising  officials.  As 


278  ROMANCE  AND  TRAGEDY  OF  BANKING 

before  stated,  sincere  and  intelligent  criticism  of  the  manner  in 
which  public  officials  discharge  their  duties  are  generally  whole- 
some and  productive  of  beneficial  results,  but  erroneous  criticism 
is  not  only  harmful  in  its  effect  but  is  unjust  to  those  against 
whom  it  is  directed,  and  when  applied  to  bank  examiners  or  to 
those  charged  with  the  administration  of  the  banking  laws,  is 
generally  based  upon  ignorance  or  misconception  of  the  law,  or 
the  facts,  or  both,  and  is  therefore  misleading  and  accomplishes 
no  good  purpose.  Bank  examiners  are  not  infallible,  and  they 
do  not  always  discover  and  size  up  a  condition  as  it  really  exists, 
but  instances  of  this  kind  are  the  exceptions  and  not  the  rule. 
Their  estimates  as  to  the  real  condition  of  a  bank  are  generally 
reasonably  accurate.  Their  powers  are  limited.  They  may  sug- 
gest where  they  have  no  authority  to  direct,  and  if  their  advice 
or  suggestions  were  followed  by  bank  officers  they  would  always 
be  found  to  be  on  the  side  of  safety  and  in  the  interest  of  good 
banking. 

Ridgely's  Policies  of  Administration 

Mr.  Ridgely's  administration  of  the  Comptroller's  office  was 
not  characterized  by  any  spectacular,  sensational,  or  demagogic 
methods.  His  policy  was  to  require  the  banks  to  observe  the  law 
and  to  enforce  such  observance  by  every  lawful  means  within  his 
power.  He  respected  the  law  himself  and  did  not  exceed  his 
statutory  authority  in  dealing  with  the  banks  by  an  arbitrary 
assumption  of  powers  which  the  law  did  not  confer  upon  him. 
Neither  did  he  seek  to  evade  responsibility  or  criticism  by  throw- 
ing the  blame  upon  the  examiner  when  the  examiner  was  not  at 
fault.  He  invariably  supported  the  examiner  in  his  efforts  to 
honestly  and  courageously  perform  his  duty,  and  the  examiners 
who  served  under  him  were  confident  that  they  would  receive  such 
support  no  matter  what  influences  might  operate  against  them. 
He  applied  the  same  rules  of  supervision  and  construction  of  the 
law  to  all  banks  alike,  large  and  small,  without  distinction  and 
without  fear  or  favor.  He  recognized  the  defects  in  the  statutes, 
so  far  as  enforcible  remedies  were  concerned,  but  did  not  arro- 
gate to  himself  legislative  powers  by  the  adoption  of  unauthor- 
ized administrative  regulations.  He  administered  the  law  as  he 


ROMANCE  AND  TRAGEDY  OF  BANKING  279 

found  it  on  the  statute  books  and  not  as  he  thought  it  should 
be.  Its  defects  he  recognized  and  pointed  out  to  Congress  and 
suggested  the  remedies,  as  the  law  requires  the  Comptroller  to 
do  in  his  annual  report  to  that  body,  and  until  such  remedies 
were  supplied  by  legislative  enactment  he  was  content  in  the 
consciousness  of  having  performed  his  duty,  regardless  of  criti- 
cism, confident  that  any  investigation  of  his  official  course  would 
sustain  him  and  place  the  responsibility  where  it  belonged. 

An  investigation  of  Mr.  Ridgely's  course  of  action  in  con- 
nection with  the  Farmers  and  Drovers  National  Bank  of  Waynes- 
burg,  or  any  other  failed  bank  during  his  administration  of  the 
Comptroller's  office,  will  show  no  just  grounds  for  criticism. 

Rinehart,  the  cashier  of  this  bank,  who  was  responsible  for 
the  wrecking  of  the  institution,  was  indicted,  convicted  and  sen- 
tenced to  a  term  of  twelve  years  in  the  penitentiary,  but  only 
partially  paid  the  penalty  for  his  crime.  He  was  pardoned  by 
a  too  merciful  President  before  serving  out  his  term. 

The  losses  on  assets  sold  and  compounded  under  order  of  the 
court  amounted  to  $1,356,281.90.  The  stockholders  were 
assessed  one  hundred  per  cent,  on  their  stock  holdings,  of  which 
amount  $149,271  was  collected.  The  creditors  have  received 
dividends  aggregating  sixty  per  cent,  of  their  claims,  amounting 
to  $1,050,121. 

The  Crisis  of  1907 

For  ten  or  twelve  years  immediately  preceding  the  panic  of 
1907,  there  was  a  steady  increase  in  prices  generally  and  in  all 
forms  of  commercial  and  industrial  activities,  legitimate  and 
speculative.  Large  sums  of  money  were  required  and  used  in  the 
development  and  equipment  of  railroads,  oil  and  mining  prop- 
erties, and  manufacturing  and  business  undertakings  generally, 
and  large  blocks  of  stocks  and  bonds  of  a  highly  speculative 
character  were  forced  upon  the  market,  a  considerable  portion 
of  which  were  of  a  fraudulent  and  criminal  nature. 

It  was  impossible  under  such  a  condition  of  affairs  to  draw 
the  line  absolutely  between  legitimate  and  conservative  enter- 
prises and  speculative  ventures  which  absorbed  credits  and  tied 
up  in  the  form  of  fixed  and  unproductive  investments  such  a  large 


280          ROMANCE  AND  TRAGEDY  OF  BANKING 

proportion  of  the  working  capital  of  the  country  that  there  was 
not  sufficient  left  to  meet  the  demands  of  legitimate  business  and 
to  finance  the  enterprises  which  had  been  undertaken. 

As  is  usual  under  such  conditions,  the  tightening  of  the  money 
market  was  the  first  symptom  of  approaching  danger  and  the 
first  indication  of  liquidation  manifested  itself  in  the  stock  market 
by  a  decline  in  stock  and  bond  quotations.  Loans  became  diffi- 
cult to  obtain  or  to  renew,  and  interest  rates  increased. 

It  was,  of  course,  natural,  and  probably  inevitable,  that  under 
such  a  condition  of  expansion  it  required  only  an  incident  to 
produce  or  precipitate  a  first-class  panic,  involving  not  only 
speculative  and  fraudulent  ventures,  but  also  legitimate  and  con- 
servative undertakings  as  well. 

The  immediate  incident  which  precipitated  the  panic  of  1907 
was  the  collapse  of  the  corner  in  the  stock  of  the  United  States 
Copper  Company,  which  had  been  engineered  by  the  firm  of  Otto 
Heinze  &  Company,  composed  of  the  brothers  and  associates  of 
F.  Augustus  Heinze,  of  Montana.  In  the  summer  of  1907,  F. 
Augustus  Heinze  made  his  appearance  upon  the  financial  stage 
in  New  York  City,  having  obtained  control  of  enough  stock  of 
the  Mercantile  National  Bank  of  that  city  to  secure  his  election 
to  the  presidency  of  that  institution. 

The  Mercantile  National  Bank  was  a  very  old  and  reputable 
institution.  It  was  originally  organized  as  a  State  Bank  in  1850, 
under  the  name  of  the  Mercantile  Bank,  and  was  converted  into 
a  national  association  April  15,  1865,  under  the  title  The  Mer- 
cantile National  Bank.  The  capital  stock  of  this  association  at 
the  time  Heinze  secured  control  was  $3,000,000.  Its  total  re- 
sources and  liabilities  were  $31,359,358  respectively,  and  its 
deposit  liabilities  were  over  $22,000,000. 

After  acquiring  control  of  the  management  of  this  bank 
Heinze  appears  to  have  employed  the  resources  of  the  institution 
to  a  considerable  extent  in  furtherance  of  his  copper  enterprises 
and  speculations,  until  the  creditors  of  the  bank  became  sus- 
picious and  distrustful  of  his  operations  and  commenced  to  with- 
draw their  funds.  The  failure  of  the  copper  corner  brought 
matters  to  a  crisis,  and  the  bank,  being  unable  to  meet  its  clear- 
ings, was  compelled  to  appeal  to  the  Clearing  House  Association 


ROMANCE  AND  TKAGEDY  OF  BANKING  281 

for  assistance.  An  examination  of  the  association  was  made  by 
a  committee  of  the  Clearing  House  for  the  purpose  of  determin- 
ing its  condition,  which  showed  that  it  was  not  only  solvent,  but 
had  a  large  surplus  intact  after  eliminating  every  loan  to  the 
Heinze  interests  which  was  considered  doubtful  or  worthless.  The 
Clearing  House  Association  therefore  determined  to  support  the 
bank,  upon  the  condition  that  Heinze  and  his  entire  board  of 
directors  would  resign  and  retire  from  the  management  of  the 
association.  On  the  morning  of  October  21,  1907,  the  bank 
opened  for  business  under  an  entirely  new  board  of  directors, 
Heinze  and  his  associates  having  been  eliminated.  The  support 
of  the  Clearing  House  Association,  however,  did  not  prove  suf- 
ficient. Withdrawals  continued,  and  a  run  was  started  upon  the 
Knickerbocker  Trust  Company,  which  was  believed  to  be  in  a 
badly  extended  condition  and  was  under  suspicion  because  of  the 
relations  of  its  president,  Charles  T.  Barney,  with  Charles  W. 
Morse  in  his  speculations. 

The  capital  of  the  Trust  Company  was  $1,200,000,  and  its 
deposits  were  over  $48,000,000.  The  run  upon  this  institution 
continued  with  such  persistency  that  the  company  was  compelled 
to  close  its  doors  on  October  22.  The  suspension  of  this  insti- 
tution seriously  aggravated  the  situation  and  added  to  the  spirit 
of  unrest  which  prevailed,  resulting  in  protracted  runs  upon  a 
number  of  banks  and  trust  companies,  and  the  failure  of  ten 
State  banks,  two  trust  companies  and  one  national  bank  in  New 
York  City  and  vicinity.  The  Mercantile  National  Bank  was 
unable  to  recover  from  the  strain  to  which  it  was  subjected 
under  the  Heinze-Morse  regime  and  was  compelled  to  go  into 
voluntary  liquidation  in  January  following. 

These  successive  failures  led  to  the  issuing  of  Clearing  House 
certificates  by  the  New  York  City  banks,  and  similar  action  was 
followed  by  nearly  all  the  banks  in  all  the  large  cities  throughout 
the  country. 

If  this  banking  crisis  had  not  been  precipitated  in  New  York 
City  by  the  suspicion  and  distrust  of  Heinze,  Morse  and  their 
associates,  although  conditions  were  ripe  for  a  panic,  it  is  reason- 
able to  assume  that  the  liquidation  that  had  been  going  on  in  the 
stock  market  would  have  proceeded  more  slowly  and  quietly  and 


282          ROMANCE  AND  TRAGEDY  OF  BANKING 

that  nothing  more  serious  than  a  gradual  decline  in  business 
activities  would  have  occurred,  instead  of  the  widespread  panic 
which  followed. 


Aetna  Banking  and  Trust  Company  of  Butte,  Mont. 

F.  Augustus  Heinze  had  also  been  connected  with  the  Aetna 
Banking  and  Trust  Company  of  Butte,  Mont.,  which  had  a 
branch  office  in  Washington,  D.  C.  This  branch  had  been  in 
operation  for  some  time  before  banks  in  the  District  of  Columbia, 
other  than  national  and  trust  companies,  organized  under  Fed- 
eral laws,  were  placed  under  the  supervision  of  the  Comptroller 
of  the  Currency.  When  all  banks  in  the  District  of  Columbia, 
no  matter  under  what  authority  organized,  were  by  Act  of  Con- 
gress placed  under  the  Comptroller's  supervision,  the  Washing- 
ton branch  of  the  Aetna  Bank  and  Trust  Company  was  the  first 
of  this  class  of  banks  to  be  examined  by  the  national  bank  exam- 
iner, because  of  numerous  inquiries  the  Comptroller  had  previ- 
ously received  from  time  to  time  as  to  its  financial  standing  and 
methods  of  operation. 

It  did  not  take  the  examiner  more  than  a  half  hour  after 
entering  the  bank  to  discover  that  it  was  not  only  hopelessly 
insolvent,  but  that  its  operations  were  fraudulent  in  the  extreme 
and  criminal,  and  the  examiner  was  instructed  to  immediately 
close  its  doors  and  take  possession  of  its  assets,  if  any  could  be 
found,  pending  his  appointment  as  receiver. 

By  the  Act  of  Congress  approved  June  25,  1906,  amendatory 
of  the  Code  of  the  District  of  Columbia,  all  banks  and  trust  com- 
panies organized  under  the  laws  of  any  of  the  States  of  the  Union, 
having  an  office  or  banking  house  located  within  the  District  of 
Columbia,  for  the  receipt  of  deposits  or  savings,  were  made  sub- 
ject to  the  provisions  of  the  national  banking  laws  in  respect  to 
making  and  publishing  reports  of  condition,  the  same  as  national 
banks  are  required  to  make  and  publish,  and  the  Comptroller 
was  authorized  to  examine  and  take  possession  of  any  such  bank, 
company  or  corporation,  for  the  same  reasons  and  in  the  same 
manner  that  he  was  authorized  to  examine  and  take  possession 
of  a  national  bank. 


ROMANCE  AND  TRAGEDY  OF  BANKING  283 

As  the  Aetna  Banking  and  Trust  Company  was  not  a  national 
bank,  and  did  not  operate  under  the  national  banking  laws,  it 
was  necessary  to  prepare  a  special  form  of  commission  in  appoint- 
ing a  receiver  for  the  Washington  branch,  and  the  Comptroller's 
counsel  was  instructed  to  prepare  a  form  that  would  meet  the 
requirements  of  law. 

After  looking  into  the  law  on  the  subject,  counsel  advised  the 
Deputy  Comptroller,  who  at  that  time  was  acting  Comptroller, 
that  he  had  no  authority  under  the  law  to  appoint  a  receiver  for 
the  branch  bank,  unless  he  was  satisfied  that  the  parent  bank  at 
Butte,  Mont.,  was  insolvent,  as  the  parent  bank  was  liable  for 
the  debts  of  the  branch,  and  if  the  former  was  solvent,  the  branch 
was  not  insolvent. 

The  Deputy  Comptroller  advised  his  counsel  that  he  did  not 
know  what  the  condition  of  the  parent  bank  at  Butte  was,  but  he 
did  know  that  the  Washington  branch  was  nothing  but  a  fraud, 
and  a  swindle  upon  the  people  of  Washington,  who  were  deposit- 
ing their  money  in  it,  and  that  it  was  his  purpose  to  place  it  in 
the  hands  of  a  receiver. 

Counsel  replied  that  there  was  no  doubt  of  the  fraudulent 
character  of  the  branch,  and  that  it  ought  to  be  placed  in  charge 
of  a  receiver,  but  as  counsel  for  the  Comptroller,  he  said  he  must 
advise  him  that  he  had  no  authority  to  appoint  a  receiver,  except 
under  the  conditions  stated. 

The  Deputy  Comptroller  said  that  he  would  assume  responsi- 
bility for  appointing  a  receiver,  and  leave  it  to  the  parent  bank 
to  question  or  dispute  the  legality  of  his  action,  and  instructed 
his  counsel  to  go  ahead  and  prepare  the  commission. 

A  receiver  was  appointed,  and,  within  an  hour  afterward, 
advice  was  received  by  wire  that  the  parent  bank  at  Butte  had 
been  closed. 

The  Deputy  Comptroller  immediately  wired  the  national  bank 
examiner  who  covered  that  territory  to  go  to  Butte  and  take 
possession  of  the  parent  bank  in  the  name  of  the  Comptroller  of 
the  Currency,  and  that  he  would  appoint  him  receiver  upon 
receipt  of  advice  that  he  had  taken  charge  of  the  bank. 

The  Comptroller's  counsel  advised  him  that  he  had  no  author- 
ity to  take  possession  of  a  State  bank.  The  Deputy  Comptroller 


284          ROMANCE  AND  TRAGEDY  OF  BANKING 

replied  that  he  would  let  the  State  authorities  raise  that  question. 

Upon  receipt  of  a  wire  from  the  national  bank  examiner  that 
he  had  arrived  at  Butte  and  had  taken  possession  of  the  bank, 
the  Deputy  Comptroller  wired  him  to  immediately  forward  to 
the  Treasurer  of  the  United  States,  for  credit  of  the  Comptroller 
of  the  Currency,  for  account  of  the  creditors  of  the  Aetna  Bank- 
ing and  Trust  Company,  all  the  cash  in  the  bank,  the  purpose 
being  to  remove  these  funds  from  the  jurisdiction  of  the  State 
authorities,  in  order  that  in  the  liquidation  of  the  affairs  of  the 
bank,  the  Washington  creditors  might  be  assured  that  they  would 
receive  their  share  of  any  dividend  that  might  be  paid. 

Up  to  this  stage  of  the  proceedings  neither  the  bank  officials 
nor  any  of  the  State  authorities  had  questioned  the  right  of  the 
Comptroller  to  take  possession  of,  and  appoint  a  receiver  for  the 
Aetna  Banking  and  Trust  Company,  but  several  months  later, 
in  a  suit  brought  by  the  receiver  against  the  Bank  of  Discount 
of  the  City  of  New  York,  to  recover  a  sum  of  money  due  his 
trust,  the  question  was  raised  by  the  defendant  as  to  the  authority 
of  a  receiver  appointed  by  the  Comptroller  of  the  Currency,  for 
a  State  banking  corporation,  having  an  office  or  branch  in  the 
District  of  Columbia,  to  sue  in  the  Circuit  Court  of  the  United 
States,  for  moneys  due  or  property  belonging  to  such  banking 
corporation,  when  such  debt  is  due  from  or  the  property  is  in  the 
possession  of  persons  outside  of  the  District  of  Columbia. 

It  was  contended  by  the  counsel  for  the  receiver,  that  if  such 
a  doctrine  should  be  allowed  to  prevail,  all  that  was  necessary  for 
a  banking  corporation  doing  business  in  the  District  of  Columbia 
to  do,  to  render  the  Act  of  Congress  ineffective,  was  to  remove 
its  assets  over  the  line  into  Maryland  or  Virginia,  and  the  receiver 
would  then  be  powerless  to  recover.  In  such  an  event  the  cred- 
itors of  the  bank  residing  in  the  District  would  be  compelled  to 
institute  suit  in  the  State  in  which  the  bank  was  incorporated, 
and  follow  the  assets  as  best  they  could. 

The  court  very  properly  held  that  if  a  banking  corporation 
organized  under  the  laws  of  a  State,  saw  fit  to  go  into  the  Dis- 
trict of  Columbia,  and  there  to  do  business,  it  must  conform  to 
the  laws  of  the  District,  and  in  case  it  did  not,  and  became  insol- 
vent, the  Comptroller  could  so  declare  and  appoint  a  receiver 


ROMANCE  AND  TRAGEDY  OF  BANKING  285 

of  all  its  assets,  no  matter  where  located,  and  apply  such  assets 
according  to  the  provisions  of  the  laws  of  the  United  States  to 
the  satisfaction  of  the  claims  of  all  the  corporation's  creditors. 
The  court  declared  that  Congress  intended  that  the  Comptroller 
should  have  the  right  to  appoint  a  receiver  for  the  corporation, 
and  not  only  for  the  branch  doing  business  in  the  District  of 
Columbia,  and  that  under  such  authority,  the  receiver  had  the 
right  to  take  possession  of  the  assets  of  the  corporation  wherever 
situated. 

This  decision  of  the  court,  therefore,  sustained  the  position 
taken  by  the  Deputy  Comptroller  in  the  beginning,  contrary  to 
the  advice  of  his  counsel. 

Returning  to  the  panic  of  1907,  from  which  this  discussion 
.somewhat  digressed,  the  results  of  this  crisis  demonstrated  that 
the  national  banks  in  New  York  City  were  in  a  very  much 
stronger  condition  than  the  trust  companies  or  State  banks. 
There  were  no  other  failures  of  national  banks  in  New  York  than 
those  mentioned.  The  First  National  Bank  of  Brooklyn  was 
forced  to  close  its  doors  on  October  25,  1907,  on  account  of  the 
failure  of  the  Williamsburg  Trust  Company  and  the  Jenkins 
Trust  Company,  of  which  latter  company,  the  First  National 
was  the  Clearing  House  agent. 

The  suspension  of  the  First  National  Bank  of  Brooklyn  was 
made  necessary  in  order  to  avoid  the  liabilities  which  would  have 
accrued  from  checks  of  the  Trust  Company  being  presented  for 
payment  to  the  national  bank  through  the  Clearing  House.  These 
two  trust  companies  were  largely  indebted  to  the  First  National 
Bank,  but  the  bank  reorganized  shortly  after  its  suspension  and 
resumed  business  February  4,  1908,  and  became  a  flourishing 
institution. 

The  weak  point  in  the  situation  in  New  York  City  during  this 
crisis  was  the  vulnerability  of  the  trust  companies  which  had 
been  receiving  commercial  deposits  and  not  carrying  against  them 
commercial  bank  reserves.  This  question  of  reserves  had  been  a 
matter  of  controversy  between  the  banks  and  the  trust  companies 
for  years,  and  this  panic  demonstrated  absolutely  the  correctness 
of  the  contention  of  the  Clearing  House  banks  that  trust  compa- 
nies should  carry  a  cash  reserve  against  commercial  deposits  the 


286  ROMANCE  AND  TRAGEDY  OF  BANKING 

same  as  commercial  banks  are  required  to  carry,  and  led  to  the 
enactment  of  the  law  of  1908,  requiring  trust  companies  in  New 
York  City  to  maintain  a  reserve  of  fifteen  per  cent,  on  demand 
deposits. 

The  reports  of  the  Comptroller  of  the  Currency  do  not  con- 
tain complete  information  as  to  the  number  of  failures  of  bank- 
ing institutions  other  than  national,  as  a  result  of  this  panic,  but 
approximately  practically  thirty-one  trust  companies  and  State 
banks  closed  their  doors  in  New  York  City  and  vicinity,  while 
only  two  national  banks  were  closed  in  the  city  and  one  in 
Brooklyn. 

The  same  conditions  existed  throughout  the  country  in 
respect  to  national  associations.  Cash  payments  were  suspended 
largely  in  some  places  and  entirely  in  others,  and  the  banks  gen- 
erally resorted  to  the  use  of  Clearing  House  certificates  in  the 
settlement  of  transactions  between  themselves,  and  all  forms  of 
scrip  were  used  as  substitutes  for  money  in  dealing  with  their 
customers.  Cash  reserves  accumulated  in  the  banks,  reaching  in 
some  instances  as  high  as  fifty  per  cent,  of  the  deposit  liabilities. 
The  effect  of  this  money  hoarding,  which  was  more  prevalent 
among  the  banks  than  with  individuals,  was  a  money  famine 
everywhere  and  a  general  paralysis  of  business. 

A  peculiar  feature  of  this  panic  was  that  while  it  started  in 
New  York  City,  through  the  lack  of  confidence  of  the  public  in 
certain  banks,  it  spread  over  the  country  through  a  lack  of  con- 
fidence of  the  banks  in  each  other,  or  rather  a  knowledge  of  their 
inability  to  obtain  from  their  city  correspondents  the  balances 
that  were  due  them. 

This  latter  phase  of  the  situation  was  attributable  to  our 
defective  reserve  laws,  which  permitted  country,  or  what  were 
known  as  fifteen  per  cent,  reserve  banks,  to  count  as  lawful  money 
reserve  nine  per  cent,  in  balances  due  them  from  approved  reserve 
agents  in  reserve  and  central  reserve  cities,  and  twenty-five  per 
cent,  reserve  banks  to  count  as  reserve  twelve  and  one-half  per 
cent,  in  balances  due  them  from  approved  reserve  agents  in  cen- 
tral reserve  cities. 

The  panic  of  1907  clearly  demonstrated  both  to  the  banks 
and  the  public  that  this  so-called  reserve  was  not  reserve  at  all, 


ROMANCE  AND  TRAGEDY  OF  BANKING  287 

as  it  was  not  available  on  demand,  and  the  accumulation  of  this 
large  amount  of  money  in  New  York  City  banks,  which  at  the 
time  of  the  panic  aggregated  $242,236,850,  was  the  means  of 
spreading  over  the  entire  country  a  currency  disturbance  which 
might  otherwise  have  been  confined  to  New  York  City  alone,  or 
at  least  to  that  vicinity. 

Notwithstanding  the  severity  of  this  panic  from  October  1, 
1907,  to  January  31,  1908,  only  twelve  national  banks  failed 
throughout  the  entire  country,  and  more  than  half  of  these  fail- 
ures were  due  to  causes  having  no  direct  connection  with  the 
panic. 

Defective  as  our  national  banking  laws  were  in  respect  to 
reserve  privileges  and  requirements,  and  difficult  as  it  was  for  the 
Comptroller  of  the  Currency  to  compel  the  banks  under  the  most 
favorable  circumstances  to  maintain  at  all  times  the  reserve 
required,  this  difficulty  was  made  more  perplexing  during  Mr. 
Ridgely's  administration  by  the  action  of  the  then  Secretary  of 
the  Treasury,  Leslie  M.  Shaw,  who,  without  warrant  of  law, 
excepted  United  States  deposits  from  reserve  requirements,  when 
the  statute  plainly  required  a  reserve  to  be  carried  "on  deposits 
in  every  respect." 

While  Congress  subsequently  legalized  the  action  of  the  Sec- 
retary of  the  Treasury  by  amending  the  law  to  except  Govern- 
ment deposits  from  reserve  computations,  this  fact  did  not  make 
the  Secretary's  action  any  the  less  unlawful  at  the  time. 

It  is  true  that  there  never  was  any  real  necessity  for  carrying 
a  reserve  on  Government  deposits,  such  deposits  being  specially 
secured  by  United  States  bonds  held  by  the  Treasury  Depart- 
ment. At  the  time  the  Secretary  made  this  exception,  however, 
the  law  made  no  distinction  between  Government  and  any  other 
deposits,  but  required  reserve  to  be  carried  against  all  deposits 
of  every  kind  and  class.  Therefore,  the  Secretary  of  the  Treas- 
ury had  no  authority  to  assume  legislative  powers  and  relieve  the 
banks  from  the  statutory  requirement  of  maintaining  a  reserve 
on  such  deposits. 

But  contrary  to  law  as  the  Secretary's  action  was  in  this 
respect,  his  subsequent  attitude,  as  disclosed  by  his  public  utter- 


L'SS    ROMANCE  AND  TRAGEDY  OF  BANKING 

anccs  and  private  conferences  with  bankers  on  the  reserve  ques- 
tion, was  much  more  so. 

In  an  address  before  the  bankers  of  the  District  of  Columbia 
and  Maryland  he  advised  them  to  use  their  reserves  whenever 
they  had  a  pressing  demand  for  loans.  This,  he  said,  in  sub- 
stance, was  what  a  bank's  reserve  was  for,  and  not  to  be  locked 
up  in  the  bank's  vaults  when  the  business  needs  of  their  respective 
communities  demanded  money. 

This  was  a  most  peculiar  statement  for  the  Secretary  of  the 
Treasury  to  make,  especially  in  the  face  of  the  provision  of  law 
which  prohibited  a  national  bank  from  making  any  loan  when 
the  lawful  money  reserve  was  below  the  legal  requirement,  and 
also  prohibited  the  declaration  of  any  dividends  while  the  reserve 
was  deficient. 

The  Secretary  of  the  Treasury  had  no  direct  supervision  of 
the  national  banks.  That  power  was  vested  in  the  Comptroller 
of  the  Currency.  If  a  bank  neglected  or  refused  to  make  good  a 
shortage  in  reserve  after  due  notice  from  the  Comptroller  to  make 
such  deficiency  good,  the  association  was  subject  to  a  receiver- 
ship, but  such  receiver  could  be  appointed  only  with  the  approval 
of  the  Secretary  of  the  Treasury.  This  was  the  only  exception 
in  the  banking  laws  which  required  the  concurrence  of  the  Secre- 
tary of  the  Treasury  in  the  appointment  of  a  receiver  for  a 
national  bank.  In  all  other  cases  the  sole  power  of  appointment 
was  vested  in  the  Comptroller  of  the  Currency. 

If,  therefore,  the  Secretary  of  the  Treasury  who  excepted 
public  deposits  from  reserve  requirements,  before  the  law  author- 
ized such  exception,  had  instructed  the  Comptroller  of  the  Cur- 
rency not  to  require  the  banks  to  carry  reserve  on  such  deposits, 
and  the  Comptroller,  in  recognition  of  the  requirements  of  law, 
and  in  the  exercise  of  his  authority  under  the  statute,  declined 
to  make  the  exception,  what  would  have  been  the  result?  The 
Comptroller  would  have  had  no  power  to  enforce  the  penalty  for 
non-observance  of  the  statute,  as  the  Secretary  would  have  said 
to  him,  "If  you  require  the  banks  to  carry  reserve  against  Gov- 
ernment deposits  and  they  neglect  or  refuse  to  do  so,  I  will  not 
concur  in  the  appointment  of  a  receiver  for  such  banks,"  and 
there  the  matter  would  have  ended.  But  the  spectacle  was  pre- 


KOMANCE  AND  TRAGEDY  OF  BANKING  289 

sented  of  the  Comptroller  of  the  Currency  endeavoring  to  compel 
the  banks  to  observe  the  law,  and  the  Secretary  of  the  Treasury 
advising  them  not  to  do  so. 

A  few  days  before  the  Secretary  of  the  Treasury  made  the 
press  announcement  relieving  public  deposits  from  reserve  re- 
quirements, the  Comptroller  had  made  a  call  upon  the  national 
banks  for  a  report  of  condition,  and  the  reports  were  coming  in 
and  being  examined  and  abstracted.  The  Comptroller  had  given 
no  instructions  in  regard  to  changing  the  rule  in  respect  to  com- 
putation of  reserve,  and  public  deposits  were  being  included  in 
the  computation  as  usual.  A  correspondent  of  a  New  York  City 
newspaper  called  at  the  office  and  inquired  of  the  Deputy  Comp- 
troller what  was  being  done  in  regard  to  relieving  the  banks  from 
carrying  reserve  on  public  deposits.  The  deputy  informed  him 
that  there  had  been  no  change  in  the  law  or  the  rule  of  the  office 
in  that  respect.  On  this  information  the  correspondent  wired 
his  paper  a  sensational  despatch  to  the  effect  that  there  was 
friction  between  the  Comptroller  and  the  Secretary  in  regard  to 
reserve  requirements  and  that  the  former  had  overruled  the  latter. 
As  a  result  of  this  telegram  Wall  Street  passed  through  a  severe 
panic  for  about  twenty  minutes  in  the  last  hours  of  trading  on 
October  3,  1902. 

According  to  the  account  of  one  of  the  New  York  newspapers, 
the  news  from  Washington  was  so  disturbing  and  so  plausibly 
authentic  that  for  a  time  the  market,  which  had  been  firm  almost 
to  buoyancy,  was  suddenly  checked,  and  room  traders  and  specu- 
lators were  taken  completely  by  surprise.  Brokers  on  the  floor 
of  the  Stock  Exchange,  observing  the  sudden  check  in  orders  from 
their  offices,  started  to  make  inquiry  as  to  the  cause,  but  before 
they  could  do  so  were  overwhelmed  with  orders  to  sell.  Stocks 
dropped  from  one  to  five  points,  irrespective  of  value,  but  St. 
Paul  suffered  the  most.  The  Secretary  of  the  Treasury  was  ap- 
pealed to  for  a  confirmation  or  denial  of  the  report,  and,  after 
conference  with  the  Comptroller,  issued  the  following  statement: 

A  wholly  unfounded  report  appears  to  have  been  sent 
from  Washington  yesterday,  calculated  to  mislead  with 
reference  to  the  action  taken  by  the  Secretary  of  the 


290          ROMANCE  AND  TRAGEDY  OF  BANKING 

Treasury  relative  to  the  maintenance  of  reserve  against 
government  deposits  secured  by  government  bonds. 

That  there  may  be  no  misunderstanding  either  as  to 
the  law  or  the  action  taken  by  the  department,  the  banks 
are  advised  that  the  National  Bank  Act  lays  down  the  rule 
that  all  associations  shall  maintain  certain  reserve  against 
all  deposits,  failing  to  do  which,  the  Comptroller  of  the 
Currency  may,  with  the  concurrence  of  the  Secretary 
of  the  Treasury,  appoint  a  receiver. 

The  law,  therefore,  lays  down  the  rule  that  the  reserve 
shall  be  maintained,  but  lodges  a  discretion  with  the  Comp- 
troller and  with  the  Secretary  as  to  the  enforcement  of  the 
rule.  You  are  therefore  notified  that  the  rule  will  not  be 
enforced  so  far  as  it  relates  to  government  deposits  secured 
by  government  bonds. 

It  must  be  borne  in  mind  in  this  connection  that  it  is 
not  the  intention  of  the  department  to  encourage  increased 
credit.  On  the  contrary,  very  great  conservatism  should  be 
exercised.  But  it  is  the  desire  of  the  department  that  no 
worthy  business  interest  shall  suffer  simply  because  a  bank 
has  invested  its  money  in  government  bonds  to  secure 
government  deposits,  and  to  that  extent  has  relieved  the 
Treasury  Department  from  a  growing  surplus  and  thus 
restricted  its  capacity  to  extend  accommodations. 

While  the  law  vested  in  the  Secretary  of  the  Treasury  and  the 
Comptroller  of  the  Currency  discretionary  powers  in  regard  to 
the  appointment  of  a  receiver  for  a  bank  which  neglects  or  refuses 
to  maintain  the  legal  reserve,  there  was  no  authority  or  discre- 
tion vested  in  either  of  these  officers  at  that  time  to  except  de- 
posits, secured  or  unsecured,  from  the  reserve  requirements,  and 
if  the  Secretary  had  the  power  to  except  Government  deposits 
from  reserve,  simply  because  they  were  secured  by  Government 
bonds,  he  also  had  the  power  to  except  any  other  deposits  that 
were  satisfactorily  secured. 

The  most  creditable  phase  of  this  remarkable  disregard  of 
the  requirements  of  the  law  was  the  fact  that  the  New  York  City 
banks  declined  to  recognize  the  Secretary's  authority  to  make 
such  exception,  and  the  following  day  the  Clearing  House  Asso- 


ROMANCE  AND  TRAGEDY  OF  BANKING  291 

elation  announced  that  twenty-five  per  cent,  reserve  would  be 
carried  upon  total  deposits,  the  same  as  usual,  without  exception. 

When  the  correspondent  who  was  responsible  for  sending  the 
sensational  message  which  caused  the  flurry  in  Wall  Street,  called 
at  the  Comptroller's  office  the  next  day,  he  was  asked  to  explain 
why  he  sent  such  a  despatch.  He  replied  that  he  did  so  upon  the 
authority  of  the  Deputy  Comptroller,  who  informed  him  that 
no  change  had  been  made  in  the  rule  for  computing  reserve,  and 
that  he  assumed  that  as  the  Secretary  had  announced  that  reserve 
would  no  longer  be  required  to  be  held  against  Government  de- 
posits and  as  the  Comptroller  was  still  including  such  deposits 
in  reserve  calculations,  there  must  necessarily  be  some  friction 
between  the  Comptroller  and  the  Secretary  on  the  subject,  and 
he  so  wired  his  paper. 

Up  to  the  time  the  Secretary  issued  the  statement  above 
quoted,  there  had  been  no  conference  between  him  and  the  Comp- 
troller on  this  subject.  The  Secretary  was  in  New  York  City 
at  the  time  he  made  the  first  announcement,  and  nothing  was 
known  in  the  Comptroller's  office  of  his  contemplated  action  ex- 
cept what  was  contained  in  the  newspapers. 

Life  of  Receiverships 

The  average  life  of  receiverships  of  national  banks  is  about 
four  years.  The  shortest  receivership  in  the  history  of  the 
national  system  was  that  of  the  Metropolitan  National  Bank  of 
Cincinnati,  Ohio.  This  bank  had  a  capital  of  $1,000,000.  The 
association  was  placed  in  the  hands  of  a  receiver  February  10, 
1888.  The  creditors  were  paid  in  full  within  thirty-five  days 
from  the  date  of  closing,  and  the  bank  was  turned  over  by  the 
receiver  to  an  agent  elected  by  the  stockholders,  with  remaining 
assets  of  the  nominal  value  of  $1,164,063. 

This  bank  was  not  insolvent  at  the  time  it  was  closed,  as  the 
speedy  liquidation  demonstrated,  but  it  was  in  a  very  weak  con- 
dition, due  to  an  inefficient  management.  The  officers  and  direc- 
tors were  heavy  borrowers  and  resorted  to  irregular  methods  to 
conceal  large  loans.  False  reports  of  condition  and  other  crimi- 
nal violations  of  law  were  discovered.  The  growing  distrust  of 


292  ROMANCE  AND  TRAGEDY  OF  BANKING 

the  depositors  in  the  management  of  the  institution  led  to  the 
adoption  of  a  resolution  by  the  board  of  directors  to  close  its 
doors,  with  the  results  above  described. 

The  most  prolonged  receivership  of  a  national  bank  was  that 
of  the  Third  National  Bank  of  Chicago,  111.  A  receiver  was 
appointed  for  this  bank  November  24,  1877,  but  its  affairs  were 
not  finally  closed  until  December  31,  1907,  thirty  years  after- 
ward, during  the  closing  months  of  Mr.  Ridgely's  administration. 
Within  five  years  after  the  bank  failed,  however,  the  receiver  had 
paid  the  creditors  in  full,  with  interest  from  the  date  of  closing. 

The  reasons  for  the  prolongation  of  this  receivership,  and  the 
unusual  results  attained  in  the  liquidation  of  the  trust,  were  that 
the  real  estate  in  and  around  Chicago  which  came  into  the  pos- 
session of  the  receiver,  enhanced  very  materially  in  value  with 
the  growth  of  the  city.  The  Act  of  June  30,  1876,  required  the 
Comptroller  to  call  a  meeting  of  the  stockholders  of  a  failed  bank 
after  the  creditors  had  been  paid  in  full,  for  the  purpose  of  elect- 
ing an  agent  to  whom  the  receiver  should  turn  over  the  remaining 
assets  for  liquidation  for  their  benefit  and  thus  terminate  the 
receivership.  A  meeting  was  promptly  called  in  this  case,  but  the 
stockholders  were  unable  to  agree  upon  the  selection  of  an  agent 
and  the  bank  was  continued  in  the  hands  of  the  receiver. 

To  meet  this  situation  and  any  similar  contingency,  the  Act 
of  June  30,  1876,  was  amended  by  the  Act  of  August  3,  1892, 
authorizing  the  shareholders  of  an  insolvent  bank  to  determine 
by  ballot  at  a  meeting  called  by  the  Comptroller  for  that  pur- 
pose, whether  to  elect  an  agent  or  to  continue  the  receivership 
until  the  affairs  of  the  association  were  finally  wound  up.  On 
January  11,  1893,  another  meeting  of  the  shareholders  of  this 
bank  was  held,  at  which  they  elected  to  continue  the  receivership 
until  final  liquidation. 

Ridgely's  Annual  Reports 

During  Mr.  Ridgely's  term  of  six  and  one-half  years,  he  sub- 
mitted seven  annual  reports  to  Congress,  his  first  report  covering 
eleven  months  of  the  term  of  his  predecessor,  Charles  G.  Dawes. 
In  concluding  this  report  Mr.  Ridgely  gave  credit  to  his  prede- 


ROMANCE  AND  TRAGEDY  OF  BANKING  293 

cessor  for  many  of  the  suggestions  and  much  of  the  statistical 
information  which  the  report  contains,  and  commended  him  for 
the  high  state  of  efficiency  in  which  he  found  the  Currency  Bureau 
when  he  took  charge,  and  the  thoroughness  of  its  organization. 

This  worthy  tribute  to  his  immediate  predecessor  was  char- 
acteristic of  Mr.  Ridgely's  appreciation  of  merit  and  justice,  and 
is  in  striking  contrast  with  the  attitude  of  his  successor  in  office, 
as  will  appear  later  on. 

In  addition  to  the  usual  statistical  information,  Mr.  Ridgely's 
reports  contain  many  practical  suggestions  and  recommendations 
for  improvements  in  our  banking  and  currency  laws,  and  con- 
tribute a  valuable  addition  to  the  literature  of  the  Comptroller's 
office  on  these  subjects,  particularly  in  respect  to  the  currency 
laws  and  their  bearing  upon  bank  panics. 

Mr.  Ridgely,  like  all  of  his  predecessors,  recognized  the  neces- 
sity for  some  important  changes  in  the  banking  and  currency 
laws,  which,  in  his  judgment,  would  have  corrected  some  of  the 
defects  in  the  statutes  and  otherwise  have  improved  the  service. 

Following  the  direction  of  the  statute,  he  submitted  in  his 
annual  reports  to  Congress  a  number  of  recommendations  for 
amendments  to  the  laws,  many  of  which  were  not  new,  but  were 
similar  in  thought  and  purpose  to  changes  suggested  from  time 
to  time  by  former  Comptrollers,  who  were  of  the  same  opinion 
as  to  the  necessity  for  such  legislation  and  therefore  his  views 
on  these  subjects  were  entitled  to  additional  weight.  But  the 
history  of  the  Bureau  shows  that  while  the  law  required  the  Comp- 
troller to  recommend  to  Congress  such  amendments  to  the  laws 
as  experience  in  their  practical  operation  and  administration  had 
shown  to  be  necessary,  very  little  attention  was  given  such  recom- 
mendations by  the  legislative  branch  of  the  Government. 

This  fact  is  particularly  exemplified  by  the  recommendations 
made  for  an  amendment  to  Section  5200  of  the  Revised  Statutes, 
in  regard  to  the  limit  of  loans  that  the  banks  might  make.  For 
more  than  thirty  years  Comptroller  after  Comptroller  recom- 
mended, not  only  once  but  repeatedly,  an  amendment  of  this  pro- 
vision of  law,  but  without  effect,  until  the  passage  of  the  Act  of 
June  22,  1906,  during  Mr.  Ridgely's  administration,  which  in- 
creased the  limit  of  loans  to  ten  per  cent,  of  the  capital  and  sur- 


294  ROMANCE  AND  TRAGEDY  OP  BANKING 

plus  of  the  bank.  It  required  over  thirty  years  to  secure  this 
amendment,  and  then  the  statute  was  not  amended  as  it  should 
have  been. 

The  most  important  of  the  amendments  to  the  law  recom- 
mended by  Mr.  Ridgely,  were  the  following: 

A  repeal  of  the  provision  of  the  Act  of  March  14,  1900,  re- 
stricting the  amount  of  national  bank  notes  of  the  denomination 
of  five  dollars  to  one-third  of  the  outstanding  circulation  of  the 
issuing  bank. 

This  limitation  had  not  worked  satisfactorily  to  the  banks  or 
to  the  Comptroller's  office,  and  was  opposed  by  the  Comptroller 
before  it  became  a  law.  After  the  bill  passed  the  House  of  Rep- 
resentatives, containing  this  restriction,  and  while  it  was  still 
pending  in  the  Senate,  the  attention  of  Mr.  Brosius,  of  Pennsyl- 
vania, who  was  then  chairman  of  the  Committee  on  Banking  and 
Currency  of  the  House  of  Representatives,  was  called  to  the 
provision  and  the  objections  thereto  set  forth.  Mr.  Brosius 
stated  that  this  limitation  was  incorporated  in  the  bill  through 
inadvertence;  that  the  intention  was  to  restrict  the  issue  of  na- 
tional bank  notes  of  the  denomination  of  five  dollars  to  one-third 
of  the  total  circulation  outstanding  of  all  the  banks,  and  not  to 
one-third  of  the  outstanding  circulation  of  each  bank. 

As  a  matter  of  fact  the  proportion  of  five-dollar  national 
bank  notes  to  the  total  national  bank  circulation  outstanding 
had  not  exceeded  thirty-one  per  cent,  since  1874,  so  that  there 
was  no  necessity  for  this  restriction  in  the  Act  of  March  14,  1900. 

Mr.  Brosius  and  a  representative  of  the  Comptroller's  office 
had  a  conference  with  Senator  Aldrich,  chairman  of  the  Finance 
Committee  of  the  Senate,  in  regard  to  this  provision,  while  the 
bill  was  still  pending  in  the  Senate,  and  the  latter  agreed  to 
correct  the  objectionable  feature  in  conference,  but  the  provision 
remained  in  the  bill  as  it  passed  the  Senate  and  so  became  a  law. 

At  the  hearing  before  the  National  Monetary  Commission  on 
December  2,  1908,  attention  was  again  called  to  this  feature  of 
the  law  and  to  the  fact  that  it  was  understood  to  have  crept  into 
the  Act  through  inadvertence.  But  Senator  Aldrich,  chairman 
of  the  commission,  stated  that  for  twenty-four  years  preceding 
that  time  the  legislation  of  Congress  had  been  framed  with  a  view 


ROMANCE  AND  TRAGEDY  OF  BANKING  295 

to  giving  to  the  silver  certificates,  to  the  greatest  extent  possible, 
the  field  for  notes  of  the  denomination  of  one,  two  and  five  dollars, 
and  he  expressed  the  opinion  that  this  policy  should  be  adhered 
to.  In  the  event  of  an  insufficiency  of  silver  certificates  of  the 
denominations  stated,  provision  had  been  made  for  the  issue  of 
United  States  notes  of  the  same  denominations. 

The  purpose,  then,  of  the  restriction  on  national  bank  notes 
of  the  five-dollar  denomination,   according  to   Senator  Aldrich, 
was  to  force  silver  certificates  of  the  smaller  denominations  into 
circulation,  notwithstanding  his  acquiescence  in  the  statement  of 
Mr.  Brosius  that  this  restriction  crept  into  the  Act  of  March  14, 
1900,   through   inadvertence.       But   whether   the   provision  was 
placed  in  the  bill  purposely  or  otherwise,  the  restriction  should 
not  have  been  made.     The  banks  should  have  been  free  to  issue 
circulation  of  any  denomination  they  desired,  and  any  restriction 
upon  their  right  or  privilege  to  do  this  simply  added  to  the  in- 
elasticity of  the  bond-secured  circulation  so  much  complained  of. 
As  a  further  means  of  increasing  the  elasticity  of  bank  cir- 
culation, Mr.  Ridgely  recommended  the  repeal  of  the  three  mil- 
lion   limitation    upon    the    amount    of    bond-secured    circulation 
allowed  to  be  retired  during  any  one  month.     This  feature  of  the 
law  was  amended  during  his  administration  by  increasing  the  limit 
on  bond-secured  circulation  to  nine  millions  per  month  and  per- 
mitting  so-called    emergency    circulation   to    be    retired   without 
limit. 

But  even  this  limitation  upon  the  bond-secured  circulation 
should  not  have  been  imposed.  The  banks  should  have  been  per- 
mitted to  increase  or  reduce  their  circulation  at  their  discretion. 
The  few  instances  of  abuse  which  might  have  resulted  from  this 
unrestricted  privilege  would  have  been  more  than  counterbalanced 
by  the  advantages  that  would  have  been  derived  from  the  added 
elasticity  to  the  circulation. 

Provision  for  the  consolidation  of  banks  is  another  amend- 
ment which  had  been  repeatedly  recommended  without  results 
until  November  7,  1918.  When  it  was  desired  to  consolidate  two 
banks,  the  only  means  of  effecting  the  consolidation  was  to  place 
one  bank  in  liquidation  and  for  the  continuing  association  to 
absorb  the  assets  and  assume  the  liabilities  of  the  liquidating 


296          ROMANCE  AND  TRAGEDY  OF  BANKING 

bank.  This  method  was  exceedingly  inconvenient  and  cumber- 
some, both  to  the  banks  and  to  the  Comptroller's  office. 

As  a  means  of  facilitating  and  extending  the  trade  of  our 
merchants  and  manufacturers  with  foreign  countries,  especially 
with  South  America  and  the  Orient,  Mr.  Ridgely  recommended 
that  national  banks  located  in  reserve  or  central  reserve  cities, 
having  a  capital  of  $1,000,000  or  more,  be  authorized  to  buy  and 
sell  foreign  exchange,  to  accept  bills  drawn  on  themselves,  pay- 
able not  to  exceed  four  months  after  sight,  to  issue  letters  of 
credit,  and  to  open  and  maintain  such  offices,  agencies  or  branches 
as  might  be  deemed  necessary  to  conduct  this  business  in  foreign 
countries  and  in  Porto  Rico,  the  Philippines,  Hawaiian  Islands, 
and  the  Panama  Canal  Zone.  This  recommendation  was  incor- 
porated in  the  Federal  Reserve  Act  of  December  23,  1913,  which 
authorized  national  banks  with  a  capital  stock  of  $1,000,000  or 
more,  with  the  approval  of  the  Federal  Reserve  Board,  to  estab- 
lish branches  in  foreign  countries  or  dependencies  of  the  United 
States. 

In  each  of  Mr.  Ridgely's  seven  annual  reports  a  good  deal  of 
thought  was  devoted  to  a  discussion  of  the  defects  in  the  national 
currency  system  and  to  suggested  remedies  therefor. 

In  his  earlier  reports  he  favored  an  emergency  currency  based 
upon  the  assets  of  the  banks,  which,  he  thought,  could  be  made 
absolutely  safe  and  immediately  available  in  times  of  stringency 
or  panic,  with  a  guarantee  fund  in  reserve  raised  by  a  tax  on  cir- 
culation. Such  circulation,  he  thought,  would  be  an  element  of 
strength  and  not  of  weakness  to  the  banks  issuing  it,  and  be 
preferable  to  any  form  of  Clearing  House  certificates  or  emer- 
gency circulation  issued  by  Clearing  Houses  or  similar  associa- 
tions, such  as  were  resorted  to  during  panics,  as  each  bank  could 
act  independently  and  quickly  meet  the  conditions  and  necessities 
in  its  own  community,  and  would  go  far  toward  preventing  emer- 
gencies from  arising  or  at  least  diminishing  their  seriousness. 

Mr.  Ridgely  thought  this  plan  would  be  the  most  simple  and 
practical  method  of  introducing  an  element  of  elasticity  into  our 
banknote  circulation  and  make  it  readily  responsive  to  the  needs 
of  the  respective  communities  in  times  of  stress  or  financial  dis- 
turbances of  any  kind.  He  therefore  recommended  that  all 


ROMANCE  AND  TRAGEDY  OF  BANKING  297 

national  banks  which  had  been  in  operation  for  not  less  than 
two  years,  and  which  had  a  surplus  fund  of  not  less  than  twenty 
per  cent,  of  their  capital  stock,  be  permitted  to  issue  notes  un- 
secured by  bond  deposits  in  amount  not  to  exceed  fifty  per  cent,  of 
their  bond-secured  notes. 

To  protect  such  notes  he  proposed  that  such  banks  should 
be  required  to  carry  the  same  reserves  as  against  deposits,  in 
gold  or  its  equivalent,  and  be  further  protected  by  a  guaranty 
fund  of  five  per  cent.,  to  be  deposited  by  the  issuing  bank  with 
the  Treasurer  of  the  United  States  before  any  notes  were  issued. 
From  this  guaranty  fund  all  such  gold  reserve  notes  were  to  be 
redeemed  on  demand.  This  guaranty  fund  was  to  be  maintained 
by  a  graduated  tax  on  the  gold  reserve  notes,  beginning  at  a  rate 
of  not  over  two  and  one-half  per  centum  per  annum,  and  every 
bank  issuing  gold  reserve  notes  should  be  required  to  provide 
means  for  the  redemption  of  such  notes  in  every  reserve  city, 
and  at  such  other  points  as  might  be  designated,  sufficiently 
numerous  and  convenient  to  put  every  national  bank  within 
twenty-four  hours  of  a  redemption  center. 

Mr.  Ridgely's  plan  did  not  contemplate  any  change  in  our 
present  system  of  bond-secured  circulation,  but  simply  provided 
for  an  additional  issue  of  emergency  notes  based  upon  a  per- 
centage of  the  bond-secured  circulation,  with  a  guaranty  fund 
created  and  maintained  in  the  manner  hereinbefore  explained. 

In  answer  to  the  objections  raised  that  an  authorized  issue 
of  uncovered  notes  would  lead  to  inflation  of  the  currency  and 
encourage  promotion  schemes  and  stock  speculations,  Mr. 
Ridgely  contended  that  such  would  not  be  the  case,  as  specula- 
tion is  not  carried  on  through  the  use  of  actual  money.  There 
is  seldom  any  cash  used  in  such  transactions,  he  said.  Opera- 
tions in  the  stock  market  are  generally  conducted  through  loans 
and  checks  drawn  against  deposit  credits.  These  proposed 
changes  in  the  law,  Mr.  Ridgely  said,  would  not  add  to  the  loans 
of  the  banks,  nor  make  any  additions  to  their  credits,  because 
the  reserve  requirements  would  be  the  same  for  notes  as  for  de- 
posits or  credits,  and  thus  afford  no  facilities  for  stock  exchange 
or  other  speculative  transactions. 


298  ROMANCE  AND  TRAGEDY  OF  BANKING 

In  his  last  annual  report,  Mr.  Ridgely  enlarged  upon  his  plan 
for  a  currency  reform  by  favoring  the  establishment  of  a  central 
bank  of  issue  and  reserve,  combining  in  a  measure  his  uncovered 
note  and  the  Clearing  House  certificate  plans,  as  affording  the 
best  means  of  imparting  to  our  currency  system  an  element  of 
elasticity  that  would  enable  the  banks  to  quickly  furnish  circula- 
tion in  times  of  sudden  demand  without  depleting  the  supply  of 
reserve  money.  He  regarded  the  central  bank  idea  as  the  most 
effective  and  satisfactory  way  of  supplying  a  currency  that 
would  meet  all  the  needs  of  the  situation  and  make  our  system  of 
currency  issues  and  redemptions  more  in  unison  with  the  most 
approved  and  reliable  banking  systems  of  the  world. 

He  outlined  his  plan  with  considerable  detail  as  to  the  forma- 
tion and  operation  of  the  central  bank  idea,  and  his  views  in  this 
respect  make  this  report  a  valuable  addition  to  the  literature  on 
this  subject. 

Amendments  to  the  Banking  Laws 

During  the  seven  years  that  Mr.  Ridgely  was  Comptroller 
there  were  ten  Acts  passed  by  Congress  amendatory  of  the  na- 
tional banking  laws,  as  follows : 

The  Act  of  April  12,  1902,  authorizing  a  further  extension 
of  the  charters  of  national  banks  for  a  period  of  twenty  years 
from  the  date  of  expiration  of  the  first  period  of  extension. 

When  this  Act  was  passed  there  was  some  question  as  to 
whether  the  Act  of  July  12,  1882,  authorized  a  second  extension 
of  charter,  and  the  Act  of  April  12,  1902,  was  regarded  as  neces- 
sary to  remove  any  doubt  on  this  subject. 

The  Act  of  April  28,  1902,  requiring  the  Comptroller  of  the 
Currency  to  annually  furnish  to  the  Secretary  of  the  Interior, 
for  publication  in  the  Official  Register,  a  list  of  all  employees  of 
the  Currency  Bureau,  including  the  names  of  national  bank  exam- 
iners and  their  clerks,  receivers  of  insolvent  banks  and  their 
attorneys  and  clerks,  and  all  other  persons  connected  with  the 
Comptroller's  office  in  Washington  or  elsewhere,  whose  salary  or 
compensation  is  paid  from  the  Treasury  of  the  United  States, 
or  from  the  funds  of  failed  associations. 


ROMANCE  AND  TRAGEDY  OF  BANKING  299 

The  Act  of  March  3,  1903,  providing  for  additional  reserve 
cities,  by  extending  the  privilege  to  banks  in  cities  with  a  popu- 
lation of  twenty-five  thousand  people,  instead  of  cities  with  a 
population  of  fifty  thousand,  as  provided  by  the  Act  of  March  3, 
1887. 

The  Act  of  February  28,  1905,  providing  that  directors  of 
banks  with  a  capital  stock  of  twenty-five  thousand  dollars,  need 
own  only  five  shares  of  the  stock  of  the  association  to  become 
eligible  as  directors,  instead  of  ten  shares,  as  provided  by  the 
Act  of  June  3,  1864. 

The  Act  of  December  21,  1905,  providing  that  the  Panama 
Canal  bonds  should  have  all  the  rights  and  privileges  accorded 
to  other  two  per  cent,  bonds  of  the  United  States  in  regard  to 
the  tax  on  circulation  secured  thereby. 

The  Act  of  June  22,  1906,  increasing  the  limit  of  loans  that 
the  banks  may  make  to  an  amount  equal  to  ten  per  centum  of 
the  capital  and  surplus  of  the  association,  not  exceeding,  how- 
ever, thirty  per  centum  of  the  capital  in  any  case. 

The  Act  of  January  26,  1907,  prohibiting  any  national  bank 
officer  under  penalty  of  a  fine  of  not  exceeding  one  thousand 
dollars,  and  not  less  than  two  hundred  and  fifty  dollars,  or  by 
imprisonment  for  a  term  of  not  more  than  one  year,  or  both  such 
fine  and  imprisonment,  from  making  any  money  contribution  in 
connection  with  any  election  at  which  presidential  and  vice- 
presidential  electors,  or  a  Representative  in  Congress,  is  to  be 
voted  for,  or  any  election  by  any  State  Legislature  of  a  United 
States  Senator. 

The  Act  of  March  4,  1907,  simply  authorized  three  thousand 
additional  copies  of  the  annual  report  of  the  Comptroller  to  be 
printed,  thereby  increasing  the  number  from  ten  thousand,  as 
fixed  by  the  Act  of  January  12,  1905,  to  thirteen  thousand  copies. 

The  Act  of  March  4,  1907,  amended  the  Acts  of  June  3, 
1864,  and  March  3,  1901,  by  requiring  the  Secretary  of  the 
Treasury,  on  or  before  January  1  of  each  year,  to  publish  a  list 
of  the  securities  required  during  that  year  for  public  deposits, 
and  required  such  deposits  to  be  distributed  equitably  between 
the  different  States  and  sections. 


LAWRENCE  O.  MURRAY 
Comptroller  of  the  Currency,  1908-1913 


CHAPTER  XIV 

Lawrence  O.  Murray 

LAWRENCE  O.  MURRAY,  the  twelfth  Comptroller  of  the 
Currency,  was  appointed  April  28,  1908.  He  was  born  in 
Steuben  County,  New  York,  in  1864.  He  was  educated 
at  Addison  College,  Niagara  University,  and  the  Metropolis  Law 
School  of  New  York,  and  was  admitted  to  the  bar  in  New  York 
City  in  1893. 

He  first  entered  the  service  of  the  Federal  Government  as 
private  secretary  to  Assistant  Secretary  of  the  Treasury  Curtis, 
under  President  Cleveland's  second  administration,  and  later  was 
appointed  chief  of  the  organization  division  in  the  office  of  the 
Comptroller  of  the  Currency. 

In  September,  1898,  he  was  appointed  Deputy  Comptroller 
of  the  Currency.  He  retained  this  place  ten  months  and  resigned 
on  June  27,  1899,  to  accept  the  position  of  trust  officer  in  the 
Trust  Company  of  America,  of  New  York  City,  a  new  organiza- 
tion. He  remained  with  this  company  three  years  and  then  became 
secretary  and  trust  officer  of  the  Central  Trust  Company  of  Illi- 
nois at  Chicago,  organized  by  Charles  G.  Dawes,  former  Comp- 
troller of  the  Currency,  who  was  president  of  the  company.  He 
resigned  this  position  to  accept  appointment  as  Assistant  Secre- 
tary of  the  Department  of  Commerce  and  Labor  in  January, 
1904,  and  continued  in  that  position  until  appointed  Comptroller 
of  the  Currency.  His  only  banking  experience  was  that  of  trust 
officer  in  two  trust  companies,  the  principal  duties  of  which  were 
to  pass  upon  the  legal  form  of  papers.  His  appointment  as 
Comptroller  was  purely  a  personal  one  on  the  part  of  President 
Roosevelt. 

Mr.  Murray  qualified  as  Comptroller  April  28,  1908,  but  on 
account  of  the  condition  of  his  health  he  did  not  assume  active 
charge  of  the  Bureau  until  September  2  following. 

Mr.  Murray  was  the  most  peculiar  character  who  ever  occu- 
pied the  office  of  Comptroller  of  the  Currency.  His  moods  and 

301 


302          ROMANCE  AND  TRAGEDY  OF  BANKING 

tenses  were  so  changeable  and  inconsistent  that  the  subordinate 
officers  and  employees  of  the  Bureau  who  came  in  daily  contact 
with  him  were  at  first  inclined  to  believe  that  his  mental  eccen- 
tricities were  due  to  the  condition  of  his  health.  But  later  they 
were  obliged  to  abandon  this  charitable  diagnosis,  because  of  the 
fact  that  as  his  health  improved  his  peculiarities  became  more 
pronounced.  His  administration  of  the  Bureau  always  will  be 
known  by  those  who  were  officially  connected  with  it  at  that  time, 
as  "the  period  of  the  reformation,"  because  of  the  numerous 
innovations  introduced  and  his  utter  disregard  of  law  and  prece- 
dent in  the  practice  of  the  office  and  in  the  enforcement  of  what 
he  termed  modern  methods  of  supervision  of  the  banks. 

The  first  official  act  of  Mr.  Murray  after  assuming  active 
charge  of  the  Bureau,  was  to  call  a  meeting  of  the  national  bank 
examiners,  to  be  held  in  Washington  on  September  21,  1908. 
About  forty-five  examiners  assembled  on  that  occasion  from  the 
Eastern  and  Atlantic  Coast  States,  among  whom  were  some  of 
the  brightest  men  in  the  service,  who  ranked  as  high  in  ability 
and  were  as  capable  of  rendering,  and  had  rendered,  as  good  and 
as  reliable  service  as  any  set  of  men  engaged  in  any  similar  line 
of  work  anywhere  in  the  country,  in  the  Government  service  or 
outside  of  the  Government  service. 

These  men  came  to  Washington  in  obedience  to  the  Comp- 
troller's call,  at  their  own  expense,  expecting,  as  they  had  a  right 
to  expect,  gentlemanly  and  courteous  treatment  at  the  hands  of 
their  official  superior.  They  supposed  that  the  Comptroller's 
purpose  in  calling  them  together  was  to  make  their  acquaintance 
and  to  advise  them  as  to  his  policies  in  regard  to  examinations. 
But  their  astonishment  and  indignation  may  well  be  imagined 
when,  in  his  opening  address,  Mr.  Murray  bluntly  informed  them 
that  his  purpose  in  calling  them  together  was  to  tell  them  that 
their  work  in  the  past  had  not  been  satisfactory  and  must  be 
improved.  He  accused  them  of  failing  to  discover  embezzle- 
ments, defalcations  and  dishonesty  of  various  kinds,  or  to  esti- 
mate correctly,  or  even  approximately,  the  value  of  the  paper 
and  securities  held  by  the  banks.  Shortages,  he  stated,  had  passed 
detection  through  several  successive  examinations,  and  other 
criminal  wrong-doing  had  failed  of  discovery.  He  told  them  that 


ROMANCE  AND  TRAGEDY  OF  BANKING  303 

their  work  was  hurried  and  superficial  and  that  they  appeared  to 
be  more  concerned  in  making  fees  than  in  getting  information  in 
regard  to  the  condition  of  the  banks,  and  warned  them  that  the 
time  for  such  carelessness  and  defective  methods  in  the  Govern- 
ment service  had  gone  by  and  should  have  ceased  long  before  that 
time. 

Mr.  Murray  concluded  his  remarks  by  telling  the  examiners 
that  the  standard  of  their  work  must  be  raised  and  that  if  they 
were  unable  to  reach  the  standard  which  he  required  of  them,  or 
if  they  were  unable  to  discover  the  true  condition  of  the  banks 
they  examined,  to  send  in  their  resignations  and  their  commis- 
sions at  once  for  cancellation. 

In  calling  this  meeting  of  the  examiners,  there  is  no  doubt 
that  Mr.  Murray  was  actuated  by  proper  motives ;  that  he  desired 
to  raise  the  standard  of  examinations  and  thus  increase  the  effi- 
ciency of  the  service  and  the  effectiveness  of  official  supervision 
of  the  banks.  But  there  was  no  foundation  or  justification  for 
his  unqualified  denunciation  of  the  work  of  the  examiners  as  a 
whole,  because  of  the  faulty  work  of  a  few  of  the  less  efficient  or 
careless  men  on  the  force.  Nor  were  the  statements  made  by  Mr. 
Murray  based  upon  any  personal  knowledge  of  the  work  of  the 
examiners  then  in  the  service.  At  the  time  he  made  this  address 
he  had  been  in  charge  of  the  Bureau  only  twenty  days.  He  had 
not  personally  examined  a  single  report  of  an  examiner,  not- 
withstanding his  statements  to  the  contrary,  and  knew  absolutely 
nothing  personally  of  the  relative  merits  or  the  efficiency  of  any 
examiner's  work.  Whatever  information  he  possessed  on  the  sub- 
ject was  derived  from  outside  sources  before  he  assumed  charge 
of  the  office,  which  was  as  unreliable  and  as  faulty  as  his  own 
impressions  and  assertions  on  that  occasion. 

In  his  address  to  the  examiners  he  told  them  that  when  he 
was  connected  with  the  Comptroller's  office  ten  years  before  that 
time  he  had  had  opportunities  for  knowing  the  quality  of  their 
work  and  declared  that  it  was  equally  as  faulty  at  the  time  of  his 
remarks  as  it  was  then.  But  it  is  a  positive  fact  that  Mr.  Mur- 
ray knew  very  little  more  about  the  work  of  the  bank  examiners 
at  the  time  of  his  former  connection  with  the  Bureau  than  he  did 


304          ROMANCE  AND  TRAGEDY  OF  BANKING 

when  he  made  his  denunciatory  remarks    on    the    occasion    re- 
ferred to. 

As  chief  of  the  organization  division  of  the  Comptroller's 
office  he  had  nothing  whatever  to  do  with  the  reports  of  national 
bank  examiners  or  their  work.  His  duties  pertained  solely  to  the 
organization  of  banks  and  the  increase  or  reduction  of  the  capi- 
tal stock  and  the  liquidation  of  existing  associations.  He  was 
Deputy  Comptroller  for  a  period  of  only  ten  months,  during 
which  time  he  had  very  little  opportunity  to  inform  himself  as  to 
the  relative  merits  of  the  examiners  or  the  thoroughness  or  laxity 
of  their  work.  At  that  time  all  the  correspondence  with  the  banks 
growing  out  of  the  reports  of  examiners  was  signed  by  the  Comp- 
troller and  such  correspondence  did  not  come  under  the  observa- 
tion of  the  Deputy  Comptroller,  except  during  the  temporary 
absence  of  the  Comptroller.  Therefore  Mr.  Murray's  sweeping 
arraignment  of  the  examiners  and  his  aspersions  upon  their  work 
were  not  based  upon  personal  knowledge  acquired  during  the  few 
days  intervening  between  September  2,  when  he  assumed  active 
charge  of  the  Bureau,  and  September  21,  when  he  made  the  ad- 
dress referred  to.  Nor  were  they  based  upon  any  knowledge 
derived  during  his  brief  connection  with  the  office  ten  years  previ- 
ously. His  impressions  of  the  work  of  the  examiners  were  predi- 
cated solely  upon  the  popular  but  erroneous  belief  that  it  is 
incumbent  upon  an  examiner  to  absolutely  know  and  insure  the 
accuracy  of  every  figure  entered  in  the  books  of  the  bank  exam- 
ined and  to  guarantee  the  genuineness  of  the  signatures  to  every 
note  and  the  financial  responsibility  of  the  maker  and  endorser. 
If  a  teller  receives  a  deposit  and  enters  only  half  of  it  on  the 
books  of  the  bank,  putting  the  other  half  in  his  pocket,  the  ex- 
aminer under  the  popular  idea  of  thoroughness  must  discover 
that  false  entry  without  ever  seeing  the  pass-book  in  which  alone 
the  correct  amount  is  shown,  and  which  is  not  accessible  to  him 
at  the  time  of  his  examination.  In  a  word,  he  must  insure  the 
absolute  honesty  of  every  employee  of  the  bank,  the  good  judg- 
ment of  its  officers  and  directors,  and  the  ability  of  the  associa- 
tion to  pay  in  full,  on  demand,  every  dollar  that  it  owes,  which, 
of  course,  carried  with  it  the  guaranty  that  every  dollar  that  has 
been  loaned  or  invested  was  collectible  in  full. 


ROMANCE  AND  TRAGEDY  OF  BANKING  305 

This  is  the  general  conception  that  the  public  has  of  what 
constitutes  an  efficient  examiner,  and  this  is  the  impossible  stand- 
ard by  which  Mr.  Murray  measured  the  work  and  worth  of  the 
examiners  whom  he  addressed,  and  the  efficiency  which,  he  admon- 
ished them,  he  would  expect  them  to  attain  and  maintain  in  the 
future. 

In  a  large  number  of  employees  such  as  constitute  the  force 
of  national  bank  examiners,  there  must  necessarily  be  different 
grades  of  efficiency.  This  is  true  of  every  class  of  public  service 
employees.  But  it  was  decidedly  unjust  and  unfair  to  measure 
the  efficiency  of  the  entire  force  by  the  shortcomings  of  the  ex- 
ceptional few,  or  to  declare  an  examiner  to  be  inefficient  after 
several  years  of  good  service  because  in  some  one  instance  he 
failed  to  discover  something  which  he  should  have  discovered,  or 
possibly  was  excusable  for  not  discovering. 

While  superficial  work  on  the  part  of  an  examiner  cannot  be 
excused  or  defended,  in  many  instances  they  have  been  unjustly 
held  accountable  for  conditions  for  which  they  were  in  nowise 
responsible  and  were  utterly  powerless  to  discover  or  correct. 

Bank  Examiners  and  Bank  Examinations 

A  successful  administration  of  the  Currency  Bureau  depends 
largely  upon  the  efficiency  of  the  force  of  national  bank  exam- 
iners and  the  thoroughness  and  reliability  of  their  work  in  con- 
nection with  the  examination  of  banks.  The  Comptroller  of  the 
Currency  has  no  means  of  ascertaining  the  condition  of  the  banks 
except  as  reflected  in  the  reports  of  the  examiners.  If  a  report 
shows  a  bank  to  be  in  a  satisfactory  condition,  he  must  accept 
it  as  correctly  representing  its  true  status,  if  he  has  any  confi- 
dence in  the  ability,  integrity  and  judgment  of  the  examiner  who 
made  the  examination.  If  a  condition  exists  other  than  that 
shown  by  the  examiner's  report,  the  Comptroller  has  no  means 
of  knowing  that  fact  until  some  unexpected  development  brings 
it  to  his  attention.  If  a  defalcation  or  shortage  is  disclosed 
which  the  examiner  failed  to  discover,  the  Comptroller  could 
know  nothing  of  it  until  revealed  through  some  other  source  by 
accident  or  otherwise.  If  the  examiner's  estimate  of  the  value 


306  ROMANCE  AND  TRAGEDY  OF  BANKING 

of  the  notes,  collaterals  and  other  securities  which  he  finds  in  a 
bank  is  unreliable  or  faulty,  that  fact  cannot  be  determined  by 
his  report. 

It  follows,  therefore,  that  if  a  successful  administration  of 
the  Currency  Bureau  depends  so  largely  upon  the  bank  exam- 
iners ascertaining  and  reporting  to  a  reasonable  degree  of  cer- 
tainty the  true  condition  of  the  banks,  the  official  reputation  of 
the  Comptroller  and  the  best  interests  of  the  service  in  general 
require  that  the  greatest  care  should  be  exercised  in  the  selection 
of  the  men  to  fill  these  important  places,  not  only  in  respect  to 
their  entire  fitness  by  training  and  experience  in  this  line  of  work, 
but  as  to  their  integrity  as  well,  so  that  they  can  be  relied  upon 
to  discharge  the  responsible  and  onerous  duties  which  attach  to 
the  position  intelligently,  thoroughly  and  conscientiously. 

No  public  employment  calls  for  a  higher  order  of  ability,  a 
more  conscientious  performance  of  duty,  and  greater  thorough- 
ness in  every  detail  than  the  position  of  a  bank  examiner.  Con- 
scientiousness because  of  the  great  interests  with  which  they 
have  to  deal,  and  which  are  affected  thereby,  and  thoroughness 
because  of  the  reliance  that  must  be  placed  in  them  by  their  offi- 
cial superior  and  the  banking  public  to  determine  the  safety  and 
solvency  of  every  bank  which  they  examine. 

A  man  may  be  fully  competent  to  satisfactorily  discharge 
the  important  duties  of  a  bank  examiner,  but  unless  he  possesses 
the  integrity  of  character  that  will  insure  absolute  reliance  upon 
a  conscientious  performance  of  duty  at  all  times  and  under  every 
condition,  even  to  the  extent  of  inconvenience  and  pecuniary  loss 
to  himself,  he  lacks  the  most  essential  qualification  upon  which 
the  Comptroller  and  the  banking  public  must  rely  in  measuring 
the  trustworthiness  of  his  work. 

The  fee  system  of  compensating  examiners  was,  in  a  measure, 
responsible  for  some  of  the  superficial  examinations  that  have 
been  made  in  the  past,  in  that  the  aggregate  monthly  earnings 
of  the  examiner  were  dependent  upon  the  number  of  examinations 
he  made.  The  tendency  of  this  was  to  increase  the  number  of 
examinations  at  the  expense  of  thoroughness.  This  temptation 
is  now  removed  under  the  salary  and  expense  method  of  compen- 
sation and  an  examiner  can  now  be  depended  upon  to  devote  as 


ROMANCE  AND  TRAGEDY  OF  BANKING  307 

much  time  to  each  bank  as  may  be  necessary  to  make  a  thorough 
examination  of  its  affairs. 

The  time  required  to  make  a  thorough  examination  varies 
with  the  volume  of  business  of  the  bank,  the  completeness  of  the 
system  employed  in  keeping  its  accounts  and  the  manner  in  which 
its  business  is  conducted.  While  the  statutory  fee  under  the  old 
system  may  have  amply  compensated  the  examiner  in  some  cases 
for  the  time  consumed  in  making  thorough  examinations,  in  other 
banks  of  the  same  size,  or  even  smaller,  it  was  wholly  inadequate 
because  of  the  additional  time  required  to  reach  the  same  results, 
owing  to  the  character  of  the  paper  carried,  the  nature  of  the 
transactions  and  the  methods  employed  by  the  banks  in  keeping 
their  books  and  accounts. 

This  fact,  however,  did  not  justify  an  examiner  in  slighting 
his  work.  He  was  in  duty  bound  to  make  as  thorough  an  exami- 
nation of  a  bank  of  the  latter  class  as  he  was  of  the  former,  and 
if  the  degree  of  thoroughness  of  his  work  was  measured  by  the 
compensation  received,  then  the  sooner  such  an  examiner  was 
removed  from  the  service  the  better  for  all  concerned,  as  his 
superficial  work  sooner  or  later  exposed  itself,  not  only  to  his 
discredit,  but  to  the  discredit  of  the  entire  system  of  official 
supervision,  and  weakened  public  confidence  in  the  efficiency  of 
examinations  in  general. 

The  qualifications  necessary  to  an  intelligent  and  satisfac- 
tory discharge  of  the  duties  of  a  bank  examiner,  in  addition  to 
integrity  of  character,  are  the  following: 

A  thorough  knowledge  of  the  principles  of  bookkeeping  and 
accounting,  a  general  knowledge  of  the  laws  governing  negotiable 
instruments  and  commercial  transactions,  good  judgment  in 
regard  to  credits  and  values,  force  of  character,  tact  and 
discretion. 

As  the  books  of  a  bank  are  the  starting  point  and  the  founda- 
tion upon  which  an  examination  must  rest,  it  is  incumbent  upon 
an  examiner  to  satisfy  himself  that  they  correctly  show  the 
resources  and  liabilities  of  the  bank  and  account  for  every  dollar 
received,  loaned  and  disbursed.  To  enable  an  examiner  to  deter- 
mine this  intelligently  and  with  certainty,  it  is  absolutely  neces- 
sarv  for  him  to  thoroughly  understand  accounts,  so  as  to  be 


308  ROMANCE  AND  TRAGEDY  OF  BANKING 

able  to  trace  an  item  or  an  entry  through  the  books  from  its 
inception  to  its  finish,  and  to  properly  check  and  verify  every 
transaction  involving  the  use  of  money,  so  as  to  be  reasonably 
certain  that  no  shortage  exists  that  is  concealed  from  him  by 
false  entries,  forced  balances,  or  a  manipulation  of  the  accounts 
in  any  other  manner. 

Bank  examiners,  however,  are  not  bank  auditors.  Unfortu- 
nately, the  distinction  between  an  examination  and  an  audit  is 
seldom  recognized  in  the  criticisms  of  examiners  when  banks 
suffer  losses  through  dishonesty  or  other  cause  which  have  re- 
mained concealed  for  some  time,  undiscovered  by  the  examiner 
through  several  successive  examinations.  A  bank  that  may  be 
thoroughly  examined  in  one  or  two  days  could  not  be  completely 
audited  in  less  time  than  one  or  two  weeks. 

When  an  examiner  satisfies  himself  that  the  books  of  original 
entry  are  correct  and  the  assets  found  in  the  bank  are  equal  in 
value  to  the  amount  called  for  by  the  books,  he  is  bound  to  assume 
that  the  original  individual  credits  which  go  to  make  up  the  grand 
total  are  correct,  and  he  cannot  know  otherwise  except  by  a  com- 
plete audit  of  the  books,  unless  errors  or  false  entries  are  discov- 
ered by  accident  or  otherwise. 

There  is  only  one  way  of  determining  the  absolute  accuracy 
of  an  individual  ledger  or  a  certificate  of  deposit  register,  and 
that  is  by  calling  in  and  balancing  or  otherwise  verifying  all  of 
the  depositors'  pass-books  and  by  verifying  each  individual  cer- 
tificate of  deposit.  It  would  require  weeks  of  time  to  do  this. 
No  examiner  could  undertake  such  a  task,  and  is  not  expected 
or  required  to  perform  such  services. 

An  audit  of  a  bank  calls  for  the  performance  of  this  work 
and  similar  detail.  An  examination  does  not.  Yet  when  a  defal- 
cation is  disclosed,  which  has  extended  over  a  period  of  several 
years  undiscovered  by  the  examiner,  the  latter  is  invariably 
charged  with  incompetency  or  superficiality  in  the  performance 
of  his  duty,  and  in  most  cases  unjustly  so  because  of  the  failure 
of  the  critics  to  discriminate  between  an  examination  and  an 
audit. 

Every  bank  in  the  system  should  receive  a  thorough  audit  at 
least  once  a  year  by  qualified  accountants  not  connected  with  the 


309 

management  of  the  bank  in  any  way.  Many  of  the  best  banks 
have  such  audits  regularly  made.  But  these  are  institutions  so 
well  managed  and  systematized  as  to  require  them  the  least.  The 
fact,  however,  that  such  audits  are  made,  has  a  wholesome  effect 
upon  the  officers  and  employees  of  the  institution  who  handle  its 
funds  in  that  the  certainty  of  discovery  deters  them  from  wrong- 
doing. It  is  opportunity  that  makes  the  thief.  It  is  rarely  that 
a  bank  is  forced  to  close  its  doors  as  a  result  of  a  sudden  loss  of 
a  large  sum  of  money  through  the  dishonesty  of  one  of  its  officers 
or  trusted  employees.  Failures  from  this  cause,  or  large  losses, 
are  usually  the  result  of  accumulated  dishonesty  extending  over 
periods  of  varying  length  and  adroitly  concealed  from  the  exam- 
iner for  an  indefinite  time.  Failure  in  most  instances  to  discover 
shortages  of  this  nature  is  no  reflection  upon  the  skill  or  efficiency 
of  the  examiner,  but  usually  is  directly  chargeable  to  the  defective 
methods  employed  in  the  management  of  the  bank,  which  afforded 
not  only  the  opportunity  for  embezzlement  in  the  first  instance, 
but  the  means  of  successful  concealment. 

No  method  of  bookkeeping,  however  perfect,  will  prevent  dis- 
honesty on  the  part  of  officers  or  employees  of  a  bank,  but  the 
opportunity  to  steal  and  the  means  of  concealing  the  theft  can 
be  minimized  by  the  adoption  of  such  methods  in  the  conduct  of 
the  bank's  business  as  experience  has  demonstrated  will  go  far 
toward  protecting  the  most  vulnerable  accounts  from  manipu- 
lation by  those  who  are  tempted  to  dishonesty  through  the  oppor- 
tunity afforded  by  the  faulty  systems  employed. 

It  is  no  reflection  upon  an  examiner  who  fails  to  discover  a 
shortage  which  is  the  result  of  the  pernicious  practice  which 
prevails  in  some  of  the  smaller  banks  of  permitting  the  individual 
ledger  bookkeeper  to  receive  deposits  and  make  entries  in  and 
balance  pass-books,  or  a  receiving  teller  to  make  entries  in  the 
ledgers.  A  shortage  due  to  the  opportunities  afforded  by  this 
objectionable  practice  may  remain  concealed  for  years  unless 
revealed  by  accident,  and  can  be  discovered  only  by  balancing  or 
verifying  the  pass-books. 

It  is  incumbent  upon  an  examiner,  in  addition  to  seeing  that 
the  business  of  the  bank  is  conducted  within  the  provisions  and 
limitations  of  the  banking  laws,  to  satisfy  himself  that  every 


310          ROMANCE  AND  TRAGEDY  OF  BANKING 

dollar  that  has  been  paid  into  the  institution,  as  shown  by  its 
books,  is  properly  accounted  for.  But  it  is  the  business  of  an 
auditor  to  determine  by  balancing  and  verifying  each  and  every 
account  whether  the  books  show  correctly  every  dollar  received. 
If  a  teller  receives  a  deposit  and  credits  the  depositor  on  the 
books  of  the  bank  with  a  less  sum  than  the  amount  received,  the 
examiner  has  no  means  of  detecting  the  shortage.  The  auditor 
will  discover  it  by  calling  in  and  balancing  the  pass-books  or 
otherwise  verifying  each  individual  balance.  If  a  cashier  or  other 
officer  issues  a  certificate  of  deposit  and  credits  the  depositor 
with  a  less  sum  than  the  amount  received,  the  examiner  cannot 
detect  the  false  entry,  but  the  auditor,  by  verifying  the  account 
with  the  holder  of  the  certificate,  will  discover  the  shortage. 

The  only  way,  therefore,  of  verifying  the  absolute  correct- 
ness of  the  books  of  a  bank,  is  by  a  complete  and  thorough  audit 
of  each  and  every  account,  and  this  a  bank  examiner  cannot  and 
should  not  be  expected  to  do  under  any  system  of  salaried  com- 
pensation. This  is  a  duty  which  devolves  upon  the  directors, 
who  are  the  trustees  of  the  funds  placed  in  their  custody  for  safe- 
keeping or  investment,  and  it  is  incumbent  upon  them  to  adopt 
such  safeguards  in  the  conduct  of  the  bank's  business  as  will 
prevent  peculations,  embezzlements  or  other  wrong-doing  by  any 
of  the  officers  or  employees,  and  insure  the  correct  accounting  for 
every  dollar  that  comes  into  their  hands.  Defalcations  and  em- 
bezzlements can  be  minimized,  if  not  prevented,  by  proper  sys- 
tems of  checking  and  handling  of  the  cash  and  accounts  of  the 
bank.  It  is  always  the  trusted  officer  or  employee  in  whom  the 
utmost  confidence  is  reposed,  who  proves  to  be  the  culprit.  An 
officer  or  employee  who  does  not  possess  the  confidence  of  the 
directors,  is  never  placed  in  a  position  of  responsibility  or  trust. 
It  is  false  economy  to  save  a  small  amount  in  operating  expenses 
at  the  risk  of  large  losses  and  consequent  discredit  to  the  institu- 
tion through  dishonesty  resulting  from  the  employment  of  loose 
or  defective  methods,  inefficiency  or  lack  of  sufficient  clerical  force 
to  properly  conduct  the  business  of  the  bank  and  safely  guard 
its  funds. 

In  addition  to  the  periodical  examination  made  by  the  na- 
tional bank  examiner,  every  bank  should  be  required  by  law  to 


ROMANCE  AND  TRAGEDY  OF  BANKING  311 

have  an  annual  audit  made  of  its  affairs  by  a  competent  account- 
ant, in  order  that  the  directors  may  be  assured  that  the  books 
of  tne  institution  correctly  represent  its  liabilities,  and  not  rely 
upon  the  bank  examiner  to  determine  this  for  them.  It  is  not 
the  duty  of  the  bank  examiner  to  ascertain  the  condition  of  the 
bank  for  the  directors.  It  is  the  business  of  the  directors  to 
determine  this  for  themselves,  independent  of  the  examiner.  Ex- 
aminations are  made  by  bank  examiners  for  the  information  of 
the  Comptroller,  who  represents  the  interests  of  the  public  in  the 
bank,  and  not  for  the  officers  or  directors  of  the  institution,  who 
have  no  right  to  rely  on  the  examiner  to  determine  for  them  the 
condition  of  their  own  association.  If  the  liabilities  of  a  bank 
are  correctly  recorded,  the  examiner  can  be  depended  upon  to 
determine  with  a  reasonable  degree  of  accuracy  the  value  of  the 
assets,  at  least  to  the  extent  of  satisfying  himself  whether  or  not 
they  are  sufficient  to  pay  the  liabilities  to  creditors  in  full. 

No  better  or  more  convincing  illustration  can  be  presented 
of  the  necessity  for  and  the  advantages  of  an  audit  of  a  bank 
than  that  afforded  by  the  failure  of  the  National  City  Bank  of 
Cambridge,  Mass.,  on  February  23,  1910,  as  a  result  of  the  defal- 
cation of  the  individual  ledger  bookkeeper,  George  W.  Coleman. 

Coleman  kept  a  small  personal  account  in  the  bank,  but  never 
had  a  pass-book,  consequently  his  account  never  was  balanced. 
He  would  draw  his  personal  check  for  three,  four  or  five  thousand 
dollars  on  the  National  City  Bank  of  Cambridge,  take  this  check 
to  the  office  of  a  curb  broker,  whose  manager  would  issue  the 
broker's  check  for  a  like  amount,  payable  to  the  order  of  a  friend 
of  Coleman.  The  broker's  checks  were  cashed  by  the  bank  in 
which  he  kept  his  account  and  the  proceeds  were  turned  over  to 
Coleman.  Coleman's  checks  were  deposited  by  the  broker  in  the 
bank  with  which  he  did  business,  for  collection  for  his  account, 
and  were  paid  the  following  morning  through  the  Clearing  House 
by  the  National  City  Bank. 

It  was  Coleman's  duty  in  the  National  City  Bank  to  check 
the  Clearing  House  items,  and  in  doing  so  he  would  abstract  his 
own  checks  from  the  incoming  mail.  The  general  ledger  and  the 
general  cash  books  were  kept  by  the  cashier,  and  the  total  checks 
paid,  including  those  coming  through  the  Clearing  House,  were 


312  ROMANCE  AND  TRAGEDY  OF  BANKING 

entered  by  him  in  the  cash  books.  It  appears  that  the  cashier 
never  inspected  the  Clearing  House  ledgers,  but  simply  posted 
the  totals  of  these  ledgers  in  the  cash  book.  The  general  ledger, 
therefore,  always  agreed  with  the  general  cash  book,  but  the 
amount  actually  due  individual  depositors  was  more  than  the 
amount  shown  on  the  individual  ledger,  owing  to  the  fact  that 
Coleman's  checks  were  continually  paid  and  were  not  charged  to 
his  account.  In  order  to  make  the  total  deposits  on  the  indi- 
vidual ledger  agree  with  the  amount  shown  on  the  general  ledger, 
Coleman,  it  appears,  resorted  to  false  entries  and  the  reduction 
of  balances  when  he  carried  forward  accounts. 

Through  this  system  of  "kiting"  checks  with  the  broker,  Cole- 
man  stole  approximately  $310,400  of  the  bank's  funds,  and  in 
carrying  forward  balances  from  day  to  day  he  manipulated  from 
forty  to  fifty  accounts.  The  defalcation  was  not  discovered  until 
an  audit  of  the  bank's  books  was  made,  although  Coleman's  pecu- 
lations extended  over  a  period  of  several  years. 

The  directors  of  the  bank  acknowledged  that  while  they  had 
noticed  a  continuous  shrinkage  in  deposits,  they  concluded  that  it 
was  due  to  the  competition  of  a  trust  company  in  the  same  city 
which  was  paying  four  per  cent,  interest  on  deposits,  and  the  fact 
that  the  board  was  not  specially  active  in  striving  to  increase 
the  business  of  the  bank.  The  audit  which  uncovered  the  short- 
age was  not  made  for  the  purpose  of  ascertaining  why  the  de- 
posits were  continually  diminishing,  but  with  a  view  to  placing 
the  association  in  liquidation  and  selling  its  business  to  the  com- 
peting trust  company. 

When  this  bank  was  closed  by  its  directors  and  the  facts 
became  public  in  regard  to  the  defalcation,  the  examiner,  as  usual, 
was  severely  criticised  for  permitting  the  conditions  disclosed  to 
have  existed  so  long  without  detection,  not  only  by  the  press  of 
the  locality,  but  by  the  directors  of  the  institution  and  the  Comp- 
troller of  the  Currency  as  well.  The  directors  assumed  to  hold 
the  examiner  blamable  for  the  conditions  for  which  they  alone 
were  responsible,  and  endeavored  to  exonerate  themselves  by 
throwing  the  blame  upon  him  under  the  plea  that  if  he  was  not 
able  to  detect  the  shortage,  they  certainly  could  not  be  expected 
to  discover  it.  And  the  Comptroller  gave  credence  to  their  ridic- 


ROMANCE  AND  TRAGEDY  OF  BANKING  313 

ulous  claim  by  publicly  suspending  the  examiner,  to  his  great 
injury  and  the  discredit  of  the  service  which  he  represented, 
before  he  had  any  knowledge  of  the  facts  other  than  that  derived 
from  unfavorable  press  despatches. 

It  never  occurred  to  the  directors  or  the  cashier  of  this  bank 
to  examine  the  individual  ledger  to  ascertain  whose  accounts  were 
being  withdrawn  and  to  inquire  of  the  depositors  the  reason  for 
closing  their  accounts.  Had  this  been  done  in  any  one  of  the 
fifty  accounts  that  the  bookkeeper  manipulated  it  would  have  led 
to  the  discovery  of  the  fact  that  the  books  of  the  bank  did  not 
show  the  correct  balance  due  the  depositor  whose  funds  were 
being  embezzled  and  whose  accounts  were  being  falsified.  The 
account  of  the  President  of  the  bank  was  one  of  those  that  was 
manipulated.  They  counted  the  cash  and  examined  all  the  bills 
and  notes  at  regular  intervals.  So  did  the  examiner.  But  they 
never  undertook  to  call  in  and  balance  pass-books,  or  verify  indi- 
vidual deposit  balances  in  any  other  way,  nor  did  they  direct  the 
cashier  to  do  so,  and  this  was  the  defective  and  vulnerable  point 
in  their  management  which  the  bookkeeper  took  advantage  of. 

After  Mr.  Murray  publicly  suspended  the  examiner  in  this 
case  he  detailed  another  examiner  to  make  an  investigation  for 
the  purpose  of  determining  whether  or  not  the  regular  examiner 
should  have  discovered  the  defalcation.  After  an  exhaustive 
report,  which  reviewed  in  detail  the  manner  in  which  the  defalca- 
tion was  effected  and  concealed,  the  degree  of  responsibility  of 
the  examiner  for  not  discovering  the  shortage,  and  the  account- 
ability of  the  directors  for  the  conditions  which  were  found  to 
exist,  the  examiner  summarized  the  situation  into  the  terse  state- 
ment that  it  was  the  same  old  story  of  directors  failing  to  direct 
and  leaving  the  affairs  of  the  bank  to  be  managed  by  a  single 
officer,  who  allowed  the  bookkeeper  to  keep  the  individual  ledger, 
balance  pass-books,  and  to  do  everything  else  that  afforded  an 
opportunity  to  steal  and  to  successfully  conceal  the  embezzle- 
ment from  detection  by  any  other  means  than  a  complete  audit 
of  the  bank,  or  by  accident.  He  stated  further,  that  if  the  exam- 
iner in  this  case  was  culpable  of  negligence  or  was  incompetent, 
then  ninety  per  cent,  of  the  examiners  in  the  service  were  equally 
culpable,  negligent  or  incompetent,  as  they  were  making  the  same 


314          ROMANCE  AND  TRAGEDY  OF  BANKING 

kind  of  examinations  and  could  not  reasonably  be  expected  to  do 
what  was  not  only  impracticable  but  impossible  under  the  then 
fee  system  of  compensation — call  in  and  balance,  or  verify  the 
pass-books  of  individual  depositors,  which  in  this  particular  case 
numbered  over  eight  hundred. 

The  foregoing  is  only  one  of  the  many  similar  cases  that  could 
be  presented  to  illustrate  the  mistaken  impressions  that  are  enter- 
tained as  to  the  scope  of  an  examiner's  duties  and  the  responsi- 
bility resting  upon  him  to  discover  everything  that  goes  wrong 
in  a  bank.  There  is  not  a  bank  examiner  in  the  employ  of  the 
Government,  no  matter  how  expert  or  efficient  he  may  be,  who 
is  not  liable  at  any  time  to  be  confronted  with  a  similar  condition 
as  that  which  existed  in  this  Cambridge  bank.  And  such  will  be 
the  case  until  examinations  partake  of  the  nature  of  an  audit  or 
the  directors  of  banks  have  an  annual  audit  made  of  their  institu- 
tions. A  few  hundred  dollars  spent  in  payment  for  an  audit  is 
a  cheap  insurance  against  wrong-doing,  and  is  more  economical 
than  a  loss  of  several  thousand  dollars  through  the  dishonesty  of 
a  trusted  officer  or  employee. 

Realizing  the  opportunities  for  embezzlements  and  the  suc- 
cessful concealment  of  the  shortage  through  the  manipulation  of 
the  individual  ledger,  Comptroller  Ridgely  at  one  time  instructed 
examiners  to  make  a  limited  verification  of  individual  deposits  by 
taking  off  at  random  a  dozen  or  more  of  the  balances  due  depos- 
itors, as  shown  by  the  individual  ledgers,  and  verify  each  such 
balance  by  correspondence  with  the  depositor.  But  these  instruc- 
tions were  almost  immediately  countermanded  because  of  the  in- 
jurious effects  the  attempted  verification  had  upon  the  banks  and 
the  trouble  it  occasioned  otherwise.  Silent  runs  were  made  upon 
some  banks  because  of  the  impression  conveyed  to  the  mind  of  the 
depositor  who  received  a  communication  from  the  examiner,  that 
there  was  something  wrong  with  the  bank  and  that  the  examiner 
was  endeavoring  to  locate  it.  Other  depositors  became  indignant 
and  informed  the  examiner  that  it  was  none  of  his  business  how 
much  of  an  account  they  carried.  In  some  instances  the  circular 
of  the  examiner  fell  into  the  hands  of  the  wife  or  husband  of  the 
depositor  and  disclosed  the  amount  of  his  or  her  balance.  Then 
there  was  trouble.  A  circular  addressed  to  the  mother-in-law  of 


ROMANCE  AND  TRAGEDY  OF  BANKING  315 

a  banker  disclosed  to  him  that  she  had  an  account  in  another 
bank,  which  gave  him  the  impression  that  his  mother-in-law  was 
afraid  to  trust  him,  or  his  bank,  with  her  funds  because  of  his 
connection  with  it.  More  trouble.  Two  sisters  had  accounts  in 
the  same  bank ;  one  received  a  circular  from  the  examiner  and  the 
other  did  not.  The  latter  assumed  that  the  books  did  not  show 
any  balance  due  her,  and  she  wrote  the  Comptroller  asking  that 
an  examination  of  her  account  be  made.  Numerous  instances  of 
a  similar  nature  could  be  cited  to  show  how  extremely  sensitive 
bank  depositors  are  and  how  very  careful  an  examiner  must  be  in 
making  inquiries  in  regard  to  a  bank's  affairs.  Yet,  if  a  bank 
were  to  fail,  or  meet  with  a  heavy  loss  through  the  manipulation 
of  the  individual  deposit  accounts,  no  one  would  be  more  severe 
in  criticising  the  examiner  and  the  Comptroller's  office  for  not 
verifying  the  individual  deposit  accounts  than  these  same  depos- 
itors who  objected  to  having  their  deposit  balance  verified. 

The  second  qualification  necessary  to  an  intelligent  and  satis- 
factory discharge  of  the  duties  of  an  examiner  is  a  thorough 
knowledge  of  the  national  banking  laws  and  a  good  knowledge 
of  the  laws  and  recognized  practices  governing  negotiable  instru- 
ments, contracts,  and  commercial  transactions  generally.  While 
it  is  not  necessary  that  an  examiner  should  be  a  lawyer,  a  good 
knowledge  of  the  law  is  helpful  to  a  man  in  whatever  occupation 
he  may  be  engaged. 

It  is  essential  that  an  examiner  should  familiarize  himself  with 
all  forms  of  contracts,  obligations  or  agreements  in  order  that  he 
may  be  able  to  intelligently  pass  upon  and  determine  their  legal- 
ity in  form  and  execution.  He  should  know  the  difference  between 
notes,  bills  of  exchange,  commercial  paper,  certificates  of  deposit, 
checks,  drafts,  negotiable  and  non-negotiable  instruments.  He 
should  know  the  rules  governing  accommodation  paper  and  legal 
and  illegal  considerations,  renewals,  or  extensions  and  their  effect 
upon  the  endorser.  He  should  know  the  degree  of  responsibility 
of  a  bank  as  a  collecting  agent  and  its  liability  for  neglect  or 
failure  to  protest  notes  or  give  notice  of  dishonor.  He  should 
be  familiar  with  the  difference  in  the  powers  or  authority  of  a 
public  and  private  corporation  to  incur  liabilities  or  obligations, 
the  legal  capacity  of  married  women,  minors,  or  irresponsible 


316  ROMANCE  AND  TRAGEDY  OF  BANKING 

persons  to  enter  into  contracts  or  incur  liabilities,  the  difference 
between  a  guaranty  and  an  ordinary  suretyship,  the  forms  and 
varieties  of  acceptances,  and  the  effect  of  material  or  immaterial 
alterations  of  negotiable  instruments. 

All  of  these  questions  and  many  others  of  a  like  nature  an 
examiner  should  be  familiar  with,  in  order  that  he  may  pass  in- 
telligently upon  the  paper,  contracts,  agreements,  collateral  and 
securities  held  by  a  bank. 

The  third  and  perhaps  the  most  important  qualification  that 
an  examiner  should  possess,  and  the  one  on  which  the  Comptroller 
must  depend  the  most  in  respect  to  the  reliability  of  his  report 
as  determining  the  true  condition  of  a  bank,  or  its  solvency  or 
insolvency,  is  the  accuracy  of  his  judgment  as  to  values.  Bankers, 
as  a  rule,  are  very  optimistic  in  regard  to  the  value  of  the  assets 
of  their  banks  and  seldom  will  admit  that  any  of  the  loans  and 
discounts  or  other  resources  of  the  institution  are  questionable 
or  worthless.  It  is  incumbent  upon  the  examiner,  therefore,  to 
determine  to  the  best  of  his  ability,  and  through  the  most  reliable 
source  of  information,  the  actual  value  of  the  paper,  collateral, 
securities  and  other  assets  which  constitute  the  resources  of  the 
bank  upon  which  reliance  must  be  placed  to  liquidate  its  liabili- 
ties to  depositors  and  other  creditors  in  full. 

Before  reaching  any  conclusion  in  this  respect,  the  examiner 
should  confer  fully  and  freely  with  the  officers  and  directors  of 
the  bank  in  regard  to  any  asset  which  he  has  reason  to  believe 
is  not  worth  its  face  value,  or  the  amount  at  which  it  is  being 
carried  on  the  books  of  the  association.  He  is  expected  and 
required  to  give  full  consideration  to  any  representations  which 
the  officers  and  directors  may  make  in  regard  to  such  assets,  but 
he  should  not  be  influenced  against  his  judgment  in  reporting 
any  asset  otherwise  than  what  he  believes  to  be  its  actual  worth. 
The  examiner  may  occasionally  err  in  his  conclusions,  but  not  so 
frequently  as  do  the  officers  or  directors.  Being  a  disinterested 
party,  if  he  has  taken  the  pains  to  inform  himself  in  regard  to 
any  asset  of  doubtful  value,  his  estimate  usually  proves  to  be  more 
reliable  than  that  of  the  bank's  officers,  and  if  he  errs  at  all  it  is 
generally  on  the  side  of  prudence  and  safety. 


ROMANCE  AND  TRAGEDY  OF  BANKING  317 

Good  judgment  is  a  quality  that  can  be  tested  only  by  results. 
It  cannot  be  determined  otherwise.  Men  may  honestly  differ  in 
opinion  as  to  the  value  of  a  bank's  assets  as  in  respect  to  any- 
thing else.  The  examiner  is  always  honest  in  his  opinion,  because 
he  has  no  reason  to  be  otherwise.  Unlike  the  representatives  of 
the  bank,  he  has  no  personal  interest  in  the  assets  which  he  esti- 
mates below  the  value  placed  upon  them  by  the  officers  and  direc- 
tors, and  his  means  of  determining  their  worth  are  equally  as 
good,  and  frequently  better  than  that  of  the  officers  of  the  insti- 
tution which  owns  or  holds  them.  If  the  officers  and  directors  of 
a  bank  were  as  honest  with  the  examiner  as  the  examiner  is  with 
them  there  would  be  less  difficulty  in  arriving  at  the  true  condi- 
tion of  affairs  and  the  interest  of  the  bank  would  be  better  sub- 
served thereby. 

Directors,  as  a  rule,  are  desirous  of  showing  as  large  a  sur- 
plus and  profit  account  as  possible  for  their  institution,  and  are 
very  reluctant  to  admit  any  losses  or  depreciation  in  values  which 
would  diminish  this  account.  Some  are  influenced  in  this  respect 
by  a  desire  to  make  a  good  showing  in  their  published  statements 
as  being  indicative  of  successful  and  profitable  management. 
Others  are  actuated  by  the  less  commendable  motive  of  giving  the 
stock  of  their  institution  a  book  value  which  it  does  not  actually 
possess,  and  as  those  who  trade  in  such  stock  have  no  means  of 
determining  its  actual  value  other  than  that  shown  by  the  bank's 
published  statements,  upon  which  the  market  value  is  usually 
based,  it  is  incumbent  upon  the  Comptroller  and  the  examiners 
to  require  banks  to  reduce  their  surplus  and  profit  accounts  in 
amounts  equal  to  the  losses  that  may  have  been  sustained  upon 
loans  or  discounts,  or  by  depreciation  in  the  value  of  other  secur- 
ities held.  And  any  officer  or  director  of  a  bank  who,  knowing 
such  losses  or  depreciations  to  exist,  signs  a  sworn  statement 
representing  the  surplus  and  profits  greater  than  they  actually 
are,  makes  a  false  report  of  the  condition  of  his  bank,  to  the 
injury  of  anyone  who  purchases  the  stock  at  a  valuation  based 
upon  such  published  statement. 

In  the  case  of  Chesbrough  et  al  v.  Woodworth  (195  Fed.  Rep. 
875)  it  was  held  that- 


318  ROMANCE  AND  TRAGEDY  OF  BANKING 

The  making  and  publishing  by  a  national  bank  of  the 
reports  required  by  statute  are  not  merely  for  the  informa- 
tion of  the  comptroller,  but  are  to  guide  so  much  of  the 
public  as  may  have  occasion  to  act  thereon,  and  one  who 
buys  from  another  stock  in  the  bank  in  reliance  upon  a 
false  report  of  its  condition  and  suffers  damage  thereby 
has  a  right  of  action  against  any  officer  or  director  who, 
knowing  its  falsity,  authorizes  such  report  under  Revised 
Statutes  5239,  which  makes  them  individually  liable  for 
damages  sustained  by  the  association,  its  stockholders, 
"or  any  other  person." 

In  the  case  of  Thomas  v.  Taylor  (224  U.  S.  73)  the  United 
States  Supreme  Court  held  that — 

The  fact  that  a  statement  of  the  condition  of  a  national 
bank  is  not  made  voluntarily,  but  under  order  of  the  Comp- 
troller of  the  Currency,  does  not  relieve  the  directors  from 
liability  for  false  statements  knowingly  made  therein. 

It  behooves  the  honest  and  conscientious  banker,  therefore, 
to  co-operate  with  the  examiner  in  his  endeavor  to  correctly  esti- 
mate the  value  of  the  bank's  assets,  instead  of  disputing  with  him 
the  existence  of  losses  which  he  knows  as  well  as  the  examiner 
have  been  sustained,  and  to  charge  such  losses  off  when  instructed 
to  do  so  by  the  Comptroller. 

The  fourth  qualification  necessary  for  an  examiner  to  possess 
to  insure  an  effective  discharge  of  his  important  duties,  is  force 
of  character,  tact  and  discretion. 

In  many  banks  there  will  be  found  some  one  man  who  domi- 
nates its  policy  or  dictates  its  management.  Unfortunately, 
there  are  too  many  instances  of  this  kind.  He  will  be  found 
either  as  one  of  the  bank's  executive  officers  or  a  member  of  the 
board  of  directors.  He  is  usually  a  strong  and  forceful  char- 
acter, pronounced  and  fixed  in  his  views,  accustomed  to  having 
his  own  way,  in  some  instances  affable,  plausible  and  diplomatic, 
in  others  arrogant  and  unreasonable,  unwilling  to  accept  sug- 
gestions, or,  if  seemingly  accepting  them,  with  no  intention  of 
adopting  them;  resentful  of  any  interference  with  his  plans  or 
purposes,  regardless  of  law  or  the  Comptroller's  regulations.  If 


ROMANCE  AND  TRAGEDY  OF  BANKING  319 

he  does  not  own  a  controlling  interest  in  the  stock  of  the  bank, 
which  enables  him  to  have  his  own  way  in  its  management,  with- 
out interference  by  the  directors,  he  is  usually  possessed  of  suf- 
ficient plausibility  and  persuasiveness  to  influence  other  members 
of  the  board  to  adopt  his  views. 

This  type  of  man  will  not  infrequently  be  found  in  a  bank 
that  has  failed  and  has  been  placed  in  the  hands  of  a  receiver, 
or  one  that  is  in  a  very  unsatisfactory  and  uncertain  condition 
because  of  the  doubtful  character  of  some  of  its  investments  and 
the  imprudent  concentration  of  loans. 

In  other  instances  the  examiner  will  find  an  unsatisfactory  or 
dangerous  condition  due  to  incompetency,  bad  judgment,  or  spec- 
ulative tendencies,  which  require  the  most  careful  management 
to  save  the  bank  from  serious  losses,  if  not  insolvency. 

To  be  able  to  cope  with  situations  of  the  kind  described,  and 
others  of  a  like  nature,  an  examiner  must  be  forceful,  resource- 
ful, tacftul  and  discreet.  Forceful  in  that  he  should  be  able  to 
maintain  whatever  position  he  believes  to  be  right,  after  satisfy- 
ing himself  as  to  the  facts,  regardless  of  whom  he  has  to  con- 
front ;  resourceful  in  that  he  should  be  competent  to  suggest  to 
the  board  of  directors  the  ways  and  means  of  extricating  the 
bank  from  an  unsatisfactory  condition ;  tactful  in  his  intercourse 
with  men  and  in  coping  with  delicate  situations,  and  discreet  in 
his  investigations  and  inquiries  concerning  the  paper  he  finds  in 
a  bank  and  the  financial  responsibility  of  borrowers,  so  as  not  to 
disclose  the  business  of  the  institution  or  injure  the  credit  of  the 
bank  or  any  of  its  customers. 

It  is  difficult  to  find  the  combination  described  fully  developed 
in  any  one  man.  The  standard  is  a  high  one  and  calls  for  an 
order  of  ability  difficult  to  obtain  for  a  compensation  such  as  is 
paid  the  average  examiner.  A  man  who  possesses  all  of  the  quali- 
fications mentioned  can  command,  and  will  have  no  difficulty  in 
obtaining  from  financial  institutions,  a  much  greater  compensa- 
tion than  a  bank  examiner  receives.  Consequently,  when  the 
Government  secures  the  services  of  such  men,  it  seldom  is  able  to 
retain  them  long,  because  their  abilit}'  is  quickly  recognized  by 
the  officers  of  the  institutions  they  examine,  who  offer  them  in- 
ducements to  enter  their  service. 


320          ROMANCE  AND  TRAGEDY  OF  BANKING 

In  a  large  force  of  examiners,  such  as  is  necessary  for  the 
Government  to  employ,  there  naturally  will  be  found  different 
degrees  of  ability,  and  while  all  of  the  examiners  do  not  measure 
up  to  the  standard  of  those  of  the  first  class,  they  are,  with  very 
few  exceptions,  men  of  as  good  average  efficiency  as  may  be  found 
engaged  in  any  similar  occupation  in  the  service  of  the  Govern- 
ment or  elsewhere.  The  degree  of  ability  varies,  of  course,  with 
the  experience  that  the  examiner  has  had  and  his  personality. 
Many  of  those  who  at  first  are  rated  in  the  second  class,  in  course 
of  time  develop  strength  and  efficiency  which  places  them  in  the 
first  rank.  Others  remain  in  the  second  class  throughout  their 
whole  term  of  service,  either  because  they  do  not  develop  any 
special  ability,  or  do  not  have  an  opportunity  to  display  any 
qualifications  above  the  ordinary,  there  being  nothing  in  the  con- 
dition of  the  banks  they  examine  which  enables  them  to  exhibit 
any  latent  force  they  might  possess. 

In  justice  to  the  force  of  examiners  as  a  whole  it  may  be 
truthfully  stated  that  but  a  very  small  percentage  of  the  total 
number  have  proven  to  be  incompetent  or  deficient  in  those  quali- 
ties which  are  essential  to  a  proper  understanding  and  satisfac- 
tory discharge  of  their  duties  in  their  respective  spheres. 

While  it  would  be  very  desirable,  of  course,  to  have  all  of  the 
bank  examiners  reach  and  maintain  the  standard  of  efficiency 
attained  by  those  of  the  first  class,  it  is  not  really  necessary  that 
this  should  be  so,  as  a  great  majority  of  the  banks  are  excellently 
well  managed  and  are  always  in  such  a  satisfactory  condition,  as 
far  as  safety  and  solvency  are  concerned,  as  to  require  no  unusual 
degree  of  ability  to  properly  examine  them.  So  that  the  average 
examiner  is  fully  capable  of  making  a  thorough  and  satisfactory 
examination  of  banks  of  this  class. 

Although  a  great  majority  of  the  banks  are  well  and  con- 
servatively managed,  fully  one-third  of  them  violate  the  law  in 
some  respects  in  the  conduct  of  their  business.  Not  the  same 
banks  continuously,  but  that  percentage  of  the  total  number  all 
the  time.  These  violations  of  law  are  not  usually  such  as  to 
endanger  the  safety  or  solvency  of  the  institutions  in  any  way, 
but  are  in  disregard  of  the  statutory  restrictions. 


ROMANCE  AND  TRAGEDY  OF  BANKING  321 

For  instance,  before  the  passage  of  the  Federal  Reserve  Act, 
the  records  showed  that  over  seventeen  per  cent,  of  the  banks 
made  loans  upon  real  estate  security  in  contravention  of  law, 
over  twenty-five  per  cent,  were  deficient  in  their  lawful  money 
reserve,  and  over  ten  per  cent,  made  loans  in  excess  of  the  legal 
limit.  Some  borrowed  money  in  excess  of  their  capital  stock. 
Some  invested  in  the  stocks  of  other  corporations,  or  made  loans 
upon  the  security  of  their  own  stock.  Some  concealed  a  portion 
of  their  surplus  or  profits  for  various  reasons,  while  others  de- 
clared dividends  out  of  profits  which  they  did  not  possess,  having 
been  absorbed  by  losses,  and  some  engaged  in  transactions  not 
within  the  scope  of  their  corporate  powers. 

These  and  numerous  other  violations  of  law  are  constantly 
disclosed  by  the  reports  of  condition  of  the  banks  and  in  the 
reports  of  national  bank  examiners. 

Notwithstanding  these  violations  of  law  by  one-third  of  the 
banks,  ninety-five  per  cent,  of  the  total  number  of  national  asso- 
ciations are  always  regarded  as  being  in  a  safe  and  solvent  con- 
dition during  normal  times,  or  under  ordinary  financial  or  mone- 
tary conditions,  and  are  well  and  conservatively  managed.  The 
remaining  five  per  cent,  are  always  in  an  unsatisfactory  condi- 
tion. Some  through  excessive  loans  made  in  violation  of  law, 
some  through  bad  or  questionable  loans,  and  some  through  im- 
prudent or  hazardous  concentration  of  loans  in  the  hands  of 
single  or  closely  affiliated  interests.  Others  through  unduly  large 
lines  of  credit  extended  to  interests  of  a  more  or  less  speculative 
nature,  with  which  some  one  or  more  of  the  officers  or  directors 
of  the  bank  were  identified. 

In  this  class  of  banks  the  capital  may  be  found  to  be  impaired 
by  losses,  necessitating  an  assessment  upon  the  stockholders,  or 
a  threatened  impairment  because  of  the  indeterminate  value  of 
their  loans  or  investments.  They  may  not  be  insolvent,  but  may 
become  so  at  any  time.  They  have  to  be  closely  watched  and 
frequently  examined. 

This  class  of  banks  demands  the  attention  of  the  most  skillful 
and  experienced  examiners,  such  as  possess  all  of  the  qualifica- 
tions described  for  those  of  the  first  class,  but  even  the  most 
experienced  of  these  will  find  their  resourcefulness  taxed  to  the 


322          ROMANCE  AND  TRAGEDY  OF  BANKING 

limit  in  endeavoring  to  extricate  a  bank  of  this  kind  from  its 
perilous  condition.  In  a  majority  of  instances  they  succeed.  In 
comparatively  few  they  fail.  The  failures  become  a  matter  of 
public  information.  The  successes  the  public  knows  nothing  of. 
Consequently,  the  examiner  and  the  Comptroller  are  usually  cen- 
sured for  nursing  a  bank  of  this  kind  known  to  be  in  a  bad  condi- 
tion in  an  unsuccessful  endeavor  to  avert  a  failure  or  to  save 
depositors  from  loss,  and  seldom,  if  ever,  receive  any  credit  for 
the  numerous  failures  averted  through  the  same  skillful  and  dis- 
creet handling  of  a  bad  situation.  But,  even  where  the  efforts 
to  save  banks  from  failure  were  unsuccessful,  the  depositors  and 
stockholders  were  benefited  by  the  nursing  the  banks  received  at 
the  hands  of  the  Comptroller  and  the  examiner,  which  resulted  in 
strengthening  the  institution  in  many  respects.  So  that  when  it 
finally  did  suspend  or  fail,  the  losses  to  depositors  were  not  so 
great  as  they  would  have  been  had  the  bank  been  closed  when  it 
was  first  discovered  to  be  in  a  bad  condition. 

As  an  illustration  of  some  of  the  successful  work  done  by  the 
Comptroller  and  the  examiners  in  saving  banks  from  failure  and 
the  community  from  the  disastrous  effects  of  a  financial  and  busi- 
ness disturbance,  it  may  be  of  interest  to  narrate  a  case  in  point. 

A  bank  in  a  city  of  large  industrial  activities  became  badly 
involved  through  the  imprudence  of  its  president  in  extending  an 
unreasonable  amount  of  credit  to  several  industrial  concerns  in 
the  same  place  which  were  owned  or  controlled  by  practically  the 
same  interests,  although  they  were  separate  corporations.  The 
principal  one  of  these  industrial  corporations  became  badly  em- 
barrassed financially  for  want  of  additional  funds  with  which  to 
carry  on  its  operations.  It  was  unable  to  meet  its  obligations 
to  the  bank.  Its  paper  became  past  due  and  the  interest  was  in 
default,  bringing  the  paper  within  the  category  of  statutory  bad 
debts.  The  other  concerns  were  also  indebted  to  the  bank  and 
were  dependent  upon  the  principal  corporation  to  meet  their  obli- 
gations. The  solvency  of  the  bank  depended  upon  the  solvency 
of  two  or  three  of  these  large  debtors.  If  the  bank  had  pressed 
for  payment,  the  principal  concern  would  have  been  forced  to 
suspend,  and  its  suspension  would  have  compelled  the  others  to 
take  like  action.  Failure  of  these  debtors  to  meet  their  obliga- 


ROMANCE  AND  TRAGEDY  OF  BANKING  323 

tions  to  the  bank  would  have  rendered  the  latter  insolvent,  neces- 
sitating the  closing  of  the  institution  and  the  appointment  of  a 
receiver.  The  business  of  the  community  would  have  been  para- 
lyzed by  the  suspension  of  the  bank  and  irreparable  injury  would 
have  been  done  to  all  interests.  Some  of  the  directors  of  the  bank 
were  interested  in  these  several  industries  and  their  failure  would 
have  meant  their  financial  ruin. 

This  was  the  situation  which  confronted  the  Comptroller's 
office.  Its  seriousness  was  fully  realized.  The  bank  was  believed 
to  be  insolvent,  and  the  question  to  consider  was  whether  the 
interests  of  the  depositors  would  be  best  subserved  by  the  immedi- 
ate closing  of  the  bank  and  the  appointment  of  a  receiver,  or  by 
allowing  it  to  continue  and  to  co-operate  with  the  directors  in 
their  efforts  to  reorganize  the  industrial  concerns,  and  place  them 
upon  a  sound  basis,  thus  assuring  their  obligations  to  the  bank 
and  its  solvency. 

The  examiner  and  the  directors  of  the  bank  were  summoned 
to  Washington  for  a  conference.  Some  of  the  directors  were 
men  of  good  business  judgment  and  integrity  and  were  fully  alive 
to  the  situation.  The  bank  had  been  allowed  to  drift  into  its 
then  dangerous  condition  through  their  negligence  in  not  prop- 
erly supervising  its  affairs  and  in  leaving  its  entire  management 
to  the  president.  A  plan  was  agreed  upon  by  which  three  of  these 
directors  were  to  assume  active  charge  of  the  bank.  No  loans 
were  to  be  made  by  the  officers,  except  upon  the  authority  and 
with  the  written  approval  of  this  committee,  and  no  loan  for  any 
material  amount  was  to  be  made  until  the  bank  had  been  placed 
in  a  solvent  and  entirely  satisfactory  condition.  All  loans  that 
were  admitted  to  be  worthless  were  to  be  immediately  charged  off, 
and  others  that  were  past  due  and  claimed  by  the  directors  to  be 
good  were  to  be  collected  or  adequately  secured.  Among  the  loans 
of  this  class  were  some  to  officers  of  the  bank. 

The  embarrassed  corporations  whose  large  liabilities  to  the 
bank  were  the  cause  of  its  predicament,  owned  valuable  proper- 
ties. These  properties  were  to  be  bonded  and  their  past-due 
paper  was  to  be  paid  partly  in  cash  from  the  proceeds  of  the 
sale  of  the  bonds,  and  the  balance  in  bonds. 


324  ROMANCE  AND  TRAGEDY  OP  BANKING 

Of  course,  an  agreement  of  this  character  could  not  be  con- 
summated in  a  day.  It  required  time  to  perfect  and  carry  out 
the  plan.  In  the  meantime  the  bank  was  in  a  very  precarious 
condition.  Any  large  creditor  could  have  precipitated  a  failure 
by  withdrawal  of  his  balance,  or  any  rumors  as  to  the  strained 
condition  of  the  bank  might  have  caused  a  run  upon  it  and  have 
forced  the  institution  to  close  its  doors. 

At  this  juncture  a  correspondent  bank  in  one  of  the  large 
cities  learned  in  some  way  of  the  straits  that  this  bank  was  in 
and  became  uneasy  in  regard  to  the  safety  of  a  deposit  balance 
which  it  had  in  the  institution,  amounting  to  over  seventy-five 
thousand  dollars.  A  representative  of  this  bank  called  at  the 
office  of  the  Comptroller  for  the  purpose  of  learning  something 
of  the  bank's  condition.  He  was  advised  that  it  was  not  the  prac- 
tice of  the  office  to  discuss  the  affairs  of  one  bank  with  the  repre- 
sentative of  another  bank,  but  as  he  declared  it  to  be  his  purpose 
to  withdraw  the  amount  due  unless  he  could  receive  some  assur- 
ance as  to  its  safety,  it  was  thought  best  to  take  him  into  the 
confidence  of  the  office  and  explain  to  him  the  true  situation,  as 
the  embarrassed  bank  was  in  no  condition  to  pay  the  demand,  if 
made  upon  it,  nor  could  one  creditor  be  allowed  to  secure  such  a 
large  preference  over  the  other  creditors  by  permitting  the  bank 
to  pay  this  claim  without  being  able  to  pay  other  demands  of 
like  tenor.  The  representative  of  the  creditor  bank  was,  there- 
fore, advised  of  the  exact  situation  and  the  plans  that  had  been 
arranged  to  relieve  the  debtor  bank  of  its  embarrassment.  He 
was  advised  of  the  confidence  of  the  Comptroller's  office  in  the 
sincerity  and  ability  of  the  directors  to  successfully  carry  out 
the  plan  agreed  upon,  and  was  told  that  if  his  bank  would  co- 
operate to  the  extent  of  allowing  its  deposit  to  remain  for  a  few 
months  it  would  materially  help  the  situation,  but  if  demand  were 
made  for  its  withdrawal,  the  bank  would  be  closed  and  placed  in 
the  hands  of  a  receiver.  The  deposit  was  allowed  to  remain.  The 
plan  arranged  with  the  directors  was  carried  out  to  the  letter. 
Bad  debts  were  charged  off,  doubtful  loans  and  overdue  paper 
were  collected  or  secured,  the  corporations  were  successful  in 
bonding  their  indebtedness,  the  bank  received  fifty  per  cent,  of 
the  amount  due  it  in  cash  and  the  remainder  in  bonds,  and  grad- 


ROMANCE  AND  TRAGEDY  OF  BANKING  325 

ually  disposed  of  the  bonds  until  the  amount  held  was  reduced 
to  a  safe  investment.  The  bank  was  finally  worked  into  a  safe 
and  sound  condition  and  is  in  successful  operation  at  this  time. 

This  is  only  one  of  the  many  delicate  and  desperate  situations 
with  which  the  Comptroller  and  the  bank  examiners  have  to  deal 
in  connection  with  the  supervision  of  the  banks.  For  every  fail- 
ure of  a  national  bank  that  has  occurred  during  the  existence  of 
the  system  a  large  number  of  associations  have  been  saved  from 
failure  through  the  excellent  work  of  the  bank  examiners  and  the 
intervention  of  the  Comptroller. 

The  quiet  and  successful  handling  of  such  cases  as  the  one 
described  never  becomes  a  matter  of  publicity,  and  this  neces- 
sarily must  be  so,  as  publicity  would  defeat  all  efforts  to 
straighten  out  a  situation  of  this  kind  by  creating  alarm  among 
the  depositors,  which  would  precipitate  the  very  condition  sought 
to  be  avoided.  Consequently,  the  examiners  and  the  Comptroller's 
office  never  receive  the  credit  to  which  they  are  justly  entitled  for 
the  effective  work  done  in  nursing  banks  that  are  in  a  critical 
condition,  or  on  the  verge  of  dissolution,  back  again  into  a  state 
of  healthy  financial  existence. 

On  the  other  hand,  if  the  nursing  remedies  fail  because  of  the 
incurable  illness  of  the  patient,  no  credit  is  given  for  the  efforts 
made  to  save  the  life  of  the  institution.  The  examiner  and  the 
Comptroller  are  severely  criticised  and  censured  for  having  per- 
mitted the  patient  to  live  so  long,  and  the  effectiveness  of  the 
system  of  official  supervision  as  a  whole  is  generally  measured 
by  the  failure  in  a  few  instances  to  accomplish  the  results  desired 
and  not  by  the  numerous  successes  achieved  in  working  banks  out 
of  desperate  situations. 

There  is  about  as  much  reason  and  justice  in  criticisms  of 
this  character  as  there  would  be  in  discrediting  a  noted  surgeon 
as  unskillful  who  in  the  course  of  his  practice  operated  success- 
fully upon  ninety-nine  cases  and  unsuccessfully  upon  one,  or  in 
measuring  the  professional  reputation  of  a  regular  practitioner 
by  the  occasional  case  that  lie  lost  in  the  course  of  a  long  prac- 
tice instead  of  by  the  many  that  he  successfully  treated  through 
the  remedies  prescribed. 


326          ROMANCE  AND  TRAGEDY  OF  BANKING 

If  all  the  excellent  work  that  bank  examiners  do  could  be 
given  the  same  degree  of  publicity  that  their  failure  to  accom- 
plish impossible  results  receives,  the  banking  public  would  have  a 
better  understanding  and  appreciation  of  the  merits  of  their 
work  and  the  potency  of  the  service  which  they  represent. 

A  great  deal  more  is  expected  of  bank  examiners  now  than 
formerly.  Originally  the  supervision  of  national  banks  was 
intended  to  protect  only  the  revenues  of  the  Government  from 
being  defrauded  and  the  general  public  from  suffering  loss 
through  the  improper  use  of  the  note  issues  of  the  banks.  When 
the  original  Act  was  under  consideration  in  the  United  States 
Senate,  a  Senator  in  the  course  of  debate  made  the  remark  that 
the  Government  had  no  interest  whatever  in  the  depositor.  It 
was  for  the  depositor  and  stockholder  to  look  after  their  own 
interests.  The  only  concern  of  the  Government,  he  said,  was  to 
see  that  the  holders  of  the  banknotes  were  fully  protected.  Now 
the  examiner  is  relied  upon  and  is  expected  to  protect  not  only 
the  interests  of  depositors  against  the  defalcations  of  bank  offi- 
cers and  employees  and  the  making  of  false  entries  in  the  books, 
injudicious  investments  and  unsafe  loans,  but  the  stockholders 
also  have  come  to  regard  him  as  the  guardian  of  their  interests 
and  depend  upon  him  to  protect  them  from  the  maladministration 
of  the  directors  of  their  own  choosing.  And  even  the  directors 
in  some  cases  expect  the  examiner  to  keep  them  informed  as  to 
whether  or  not  the  officers  of  their  selection  are  properly  conduct- 
ing the  bank's  affairs. 

While  examiners  are  required  to  remain  in  a  bank  long  enough 
to  satisfy  themselves  that  they  know  its  true  condition  in  every 
detail,  they  are  not  required  nor  expected  to  make  an  audit,  and 
depositors  and  stockholders  should  not  expect  examinations  to 
be  so  thorough  as  to  relieve  the  directors  of  their  individual  ac- 
countability for  the  proper  conduct  of  the  trust  which  they 
assume  in  accepting  the  position  of  director. 

If  bank  directors  were  rigidly  held  to  a  strict  accountability 
for  the  faithful  and  honest  performance  of  the  duties  that  devolve 
upon  them  in  the  management  of  their  banks,  there  would  not  be 
so  much  necessity  for  dependence  upon  an  examiner  to  discover 
during  the  brief  period  covered  by  his  semi-annual  examinations, 


ROMANCE  AND  TRAGEDY  OF  BANKING  327 

the  conditions  that  have  been  successfully  concealed  from  those 
whose  duty  it  is  to  be  in  the  bank  every  day  and  to  direct  the 
management  of  its  business. 

Rotation  of  Examiners 

The  rotation  of  bank  examiners  has  been  frequently  suggested 
as  a  means  of  increasing  the  efficiency  of  the  force  and  the  effec- 
tiveness of  examinations,  but  this  practice  never  had  been  fol- 
lowed to  any  great  extent  by  the  Comptroller's  office  until  Mr. 
Murray's  administration.  The  merits  of  the  plan  had  been  thor- 
oughly considered  by  former  Comptrollers,  with  the  conclusion 
that  while  rotation  may  have  some  advantages  over  the  system 
of  permanent  assignments,  it  has  also  its  disadvantages,  and  the 
latter  were  believed  to  greatly  outweigh  the  former.  The  more 
familiar  an  examiner  becomes  with  the  financial  responsibility 
and  business  reputation  of  the  makers  and  endorsers  of  the  paper 
which  he  finds  in  a  bank,  the  more  accurately  he  is  able  to  esti- 
mate the  worth  of  the  bank's  loans  and  to  determine  the  value 
of  its  securities.  This  knowledge  cannot  be  acquired  by  one  or 
two  examinations  of  a  bank,  but  the  examiner  who  remains  for  a 
considerable  time  in  a  district,  handles  the  same  paper  so  fre- 
quently that  its  worth  becomes  as  well  known  as  the  market  value 
of  a  Government  bond,  whether  the  paper  be  that  of  an  individ- 
ual, a  firm,  or  a  corporation. 

Probably  the  strongest,  and,  in  fact,  the  only  argument  that 
can  be  advanced  in  favor  of  rotation,  is  that  when  an  examiner 
has  been  regularly  assigned  to  a  district  for  a  long  time,  he  may 
become  too  well  acquainted  and  too  intimate  with  the  officers  of 
the  banks  he  examines,  and  becomes  too  trustful  in  their  repre- 
sentations to  him.  He  may  take  too  much  for  granted  and  rely 
upon  their  statements  instead  of  verifying  everything  and  satis- 
fying himself  through  other  sources  of  information  as  to  the  value 
of  assets.  There  have  been  instances  of  this  kind  in  the  past,  and 
there  no  doubt  will  be  others  in  the  future,  but  they  are  the  excep- 
tion and  not  the  rule. 

To  guard  against  this  contingency,  it  had  been  the  practice 
of  the  Comptroller's  office  for  years  to  divide  the  country  into 


328  ROMANCE  AND  TRAGEDY  OF  BANKING 

examination  districts.  Each  district,  with  a  few  exceptions,  had 
two  examiners,  who  exchanged  their  list  of  banks  in  the  district 
every  six  months  and  alternated  in  their  examinations. 

While  regular  rotation  of  examiners  is  not  believed  to  be 
advantageous,  there  always  has  been  more  or  less  detailing  from 
one  district  to  another.  When  the  work  of  an  examiner  falls  in 
arrears  in  consequence  of  sickness,  absence  on  leave,  or  assign- 
ment to  special  duty,  an  examiner  from  another  sub-district 
whose  work  is  up  to  date,  is  usually  detailed  to  make  examina- 
tions in  the  territory  in  arrears,  and  such  details  have  been  made 
frequently. 

When  the  regular  examiner  for  a  district  found  a  bank  in  a 
very  unsatisfactory  condition,  requiring  more  time  to  thoroughly 
examine  it  than  he  could  afford  to  devote  to  the  work  under  the 
old  system  of  compensation,  he  usually  reported  the  situation  as 
he  understood  it  to  the  Comptroller  and  suggested  the  advis- 
ability of  a  special  examination.  For  a  special  examination  a 
per  diem  was  provided,  chargeable  to  the  special  examination  fund 
appropriated  by  Congress  for  that  purpose.  The  examiner  was 
expected  and  required  to  remain  in  the  bank  as  long  as  was 
necessary  for  him  to  determine  accurately  its  condition,  and,  if 
possible,  to  have  its  affairs  placed  in  a  satisfactory  shape. 

Before  the  advent  of  the  so-called  examiner-at-large,  under 
Mr.  Murray's  administration,  the  regular  examiners  were  usual- 
ly authorized  to  make  such  special  examinations.  They  did 
the  work  fully  as  well,  and  at  less  expense.  Being  in  the 
vicinity  of  the  bank,  they  consumed  less  time  in  travel  in 
reaching  the  locality,  and  were  more  familiar  with  the  sit- 
uation. It  did  not  follow,  therefore,  that  because  an  exam- 
iner-at-large was  detailed  to  make  a  special  examination  in 
another  examiner's  district,  that  the  former  was  superior  in  abil- 
ity to  the  regular  examiner  for  that  territory,  as  the  reverse  was 
frequently  the  case,  and  there  were  any  number  of  examiners  on 
the  regular  force  who  were  the  equals  in  ability  of  any  of  those 
who  were  designated  examiners-at-large,  and  could  have  accom- 
plished as  satisfactory  results  through  a  regular  examination 
had  they  been  allowed  the  same  rate  of  compensation.  In  fact, 


ROMANCE  AND  TRAGEDY  OF  BANKING  329 

there  were  instances  where  regular  examiners  were  detailed  to 
review  the  work  of  examiners-at -large. 


Bonding  of  Examiners 

The  law  never  required  a  national  bank  examiner  to  give  a 
bond,  and  bonds  never  were  required  of  them  until  Mr.  Murray's 
administration.  At  the  hearing  before  the  National  Monetary 
Commission  in  December,  1908,  an  amendment  to  the  law  in  this 
respect  was  recommended,  for  the  reason  that  as  examiners  are 
frequently  placed  in  charge  of  suspended  or  failed  associations, 
pending  reorganization  and  resumption,  or  the  appointment  of  a 
permanent  receiver,  it  was  thought  desirable  to  place  them  under 
bond. 

Mr.  Murray  did  not  support  this  recommendation  on  that 
occasion,  but  subsequently,  without  any  authority  of  law,  required 
all  examiners  to  give  a  fidelity  bond  in  the  penal  sum  of  twenty 
thousand  dollars. 

The  law  authorizes  the  Comptroller  to  require  bonds  of  re- 
ceivers of  national  banks,  but  not  of  bank  examiners,  and  it  is 
questionable,  in  the  absence  of  any  statutory  authority,  whether 
such  bonds  are  enforcible. 

Instances  of  dishonesty  on  the  part  of  bank  examiners  are 
very  rare  in  the  history  of  the  service.  Their  efficiency,  individ- 
ually and  collectively,  has  been  frequently  questioned,  but  their 
honesty  has  seldom  been  assailed.  Examiners  have  been  known 
to  borrow  small  sums  of  money  from  banks  which  they  examined, 
in  violation  of  the  office  regulation,  and  to  neglect  to  pay  it  back, 
but  it  is  rarely,  so  rare  that  only  one  instance  can  be  recalled, 
that  an  examiner  has  been  accused  of  actual  embezzlement.  The 
case  referred  to  was  that  of  an  examiner  who  made  a  practice 
of  abstracting  a  twenty-dollar  bill  from  the  currency  of  the  bank 
while  it  was  in  his  possession  for  the  purpose  of  being  counted. 
On  one  occasion  a  package  of  the  bank's  own  notes  was  given 
him  to  count.  These  notes  had  never  been  put  into  circulation. 
They  were  as  fresh  and  new  as  when  received  from  the  Treasury 
Department,  and  were  cut  and  stacked  in  a  package  in  the  order 
of  their  numbers.  When  the  package  was  returned  to  the  teller. 


330          ROMANCE  AND  TRAGEDY  OF  BANKING 

he  counted  the  notes  before  returning  them  to  the  vault  and  found 
the  package  short  twenty  dollars.  He  informed  the  cashier  of 
the  fact,  who  advised  him  not  to  mention  it.  Within  an  hour 
after  the  examiner  had  completed  his  examination  and  left  the 
bank,  one  of  the  bellboys  from  a  nearby  hotel  came  into  the  bank 
with  a  twenty-dollar  bill  to  have  changed.  The  teller  recognized 
the  bill  as  the  missing  note  from  the  package  referred  to  and 
inquired  of  the  boy  where  he  got  the  note.  He  stated  that  the 
cashier  of  the  hotel  gave  it  to  him  to  get  changed.  A  messenger 
was  sent  to  the  hotel  to  ascertain  from  whom  the  cashier  received 
the  note  and  he  was  informed  that  the  bank  examiner  had  paid 
his  bill  with  it  a  half-hour  before. 

This  fact  was  not  reported  to  the  Comptroller's  office  until 
long  after  the  examiner  had  left  the  service,  when  it  was  learned 
that  this  examiner  had  done  the  same  thing  in  a  number  of  other 
banks.  Nor  was  it  known  to  the  Comptroller  that  other  exam- 
iners had  borrowed  money  from  banks  that  they  examined  until 
after  their  separation  from  the  service. 

Bankers,  as  a  rule,  will  not  report  such  occurrences.  They 
seem  to  be  under  the  impression  that  if  they  incur  the  displeasure 
or  ill-will  of  the  examiner,  he  will  cause  them  annoyance  or 
trouble.  No  banker  who  is  conducting  his  bank  in  a  lawful  and 
conservative  manner  should  have  any  fear  of  an  examiner  caus- 
ing him  any  annoyance  or  injury  for  having  reported  to  the 
Comptroller  any  occurrences  of  the  nature  indicated,  or  any  dere- 
liction of  duty  or  improper  conduct  on  the  part  of  an  examiner. 
On  the  contrary,  it  is  a  duty  which  he  owes  to  himself,  the  service 
which  the  examiner  represents,  and  the  public,  to  promptly  report 
all  such  matters,  for  the  sooner  such  men  are  exposed  and  re- 
moved from  the  service,  the  better  for  all  concerned. 

Another  illustration  of  the  character  of  men  who  have  occa- 
sionally crept  into  the  service  may  be  found  in  the  case  of  an 
examiner  who,  at  the  time  of  his  appointment  and  for  several 
years  prior  thereto,  was  cashier  of  a  national  bank,  and  whose 
reputation  and  standing  in  his  community  was  all  that  could  be 
desired.  It  appears  that  the  previous  examiner  who  had  made  a 
number  of  examinations  of  this  cashier's  bank  prior  to  the  latter's 
appointment  had  accepted  his  statement  without  verification  that 


ROMANCE  AND  TRAGEDY  OF  BANKING  331 

a  certain  old  safe  in  the  bank  contained  securities  of  the  value  of 
about  five  thousand  dollars.  The  safe,  he  said,  had  not  been  opened 
for  years  and  the  combination  had  been  lost.  He  described  the 
securities  that  were  alleged  to  be  in  the  safe,  said  that  he  knew 
they  were  in  it,  and  as  the  bank  had  no  immediate  use  for  them 
he  did  not  want  to  break  open  the  safe  until  it  was  necessary  to 
do  so. 

The  examiner  accepted  this  statement,  listed  the  securities  as 
assets  of  the  bank  on  hand,  and  so  reported  them,  but  he  did  not 
report  that  they  were  locked  up  in  an  old  safe  to  which  he  had 
not  obtained  access. 

This  examiner  left  the  service  and  the  cashier  referred  to  was 
appointed  to  the  vacancy.  He  made  regular  examinations  of  this 
bank  of  which  he  was  formerly  cashier,  but  made  no  mention  of 
the  securities  in  the  old  safe,  always  reporting  them  as  part  of 
the  bank's  assets.  This  examiner  remained  in  the  service  several 
years,  during  all  of  which  time  he  made  the  regular  examinations 
of  this  bank.  He  finally  resigned  to  accept  his  former  position 
in  the  same  bank.  When  the  examiner  who  succeeded  him  made 
the  first  examination  of  this  bank  he  was  told  the  same  story 
of  the  securities  in  the  old  safe,  but  he  informed  the  cashier  that 
it  would  be  necessary  for  him  to  see  them,  and  insisted  upon  the 
safe  being  broken  open,  otherwise  he  would  report  the  assets  five 
thousand  dollars  short.  The  cashier  protested  against  the  de- 
struction of  the  safe,  but  the  examiner  insisted  upon  its  being 
opened.  A  blacksmith  was  sent  for,  the  safe  broken  open,  and 
was  found  to  be  empty.  The  cashier  was  subsequently  indicted 
for  embezzlement,  but  failed  of  conviction  for  want  of  proof. 

Notwithstanding  the  few  incompetents  and  derelicts  that  have 
been  foisted  upon  the  service  from  time  to  time,  to  its  discredit, 
the  record  as  a  whole  is  very  gratifying.  The  long  roll  of  bank 
examiners  employed  since  the  establishment  of  the  Currency 
Bureau,  contains  many  honorable  names  of  men  of  a  high  order 
of  ability  and  integrity,  who  were  a  credit  to  the  service  during 
their  connection  with  it,  and  who  subsequently  distinguished 
themselves  in  the  world  of  banking  and  finance  and  in  other  fields 
of  activitv  and  usefulness. 


332  ROMANCE  AND  TRAGEDY  OF  BANKING 

The  efforts  of  Mr.  Murray  to  raise  the  standard  of  bank 
examinations  were  commendable  and  would  have  received  the 
hearty  support  and  co-operation  of  every  examiner  in  the  service 
had  he  proceeded  in  a  proper  and  orderly  way  to  inaugurate  his 
improvements.  But  his  unwarranted  reflections  upon  their  integ- 
rity and  efficiency,  and  the  publicity  given  his  remarks  at  the 
time,  were  calculated  to  and  did  inspire  antagonism  rather  than 
co-operation.  Had  Mr.  Murray  called  the  examiners  together 
and,  behind  closed  doors,  told  them  in  plain  and  unmistakable 
terms  what  he  required  of  them,  much  good,  no  doubt,  would  have 
been  accomplished.  But  his  weakness  for  sensational  publicity, 
and  his  disposition  to  continually  play  to  the  galleries  through 
the  medium  of  the  public  press  (a  weakness  that  prevailed 
throughout  his  administration),  had  the  effect  of  not  only  sub- 
jecting the  examiners  to  derision  by  the  public  and  to  discredit 
among  the  bankers  of  the  country,  but  severely  and  unjustly 
reflected  upon  the  administrations  of  his  predecessors  in  office 
and  inflicted  incalculable  injury  upon  the  service  as  a  whole  by 
shaking  confidence  in  the  efficacy  of  bank  examinations. 

The  results  of  the  good  work  that  examiners  did  never  became 
a  matter  of  public  information.  The  superficial  work  exposed 
itself.  The  relative  merits  of  every  examiner  in  the  service  was  a 
matter  of  record  in  the  Comptroller's  office,  and  the  proper  course 
for  Mr.  Murray  to  have  pursued,  if  he  earnestly  desired  to 
strengthen  and  improve  the  service,  was  to  have  silently  weeded 
out  such  of  the  examiners  as  were  known  to  fall  below  the  stand- 
ard of  efficiency  necessary  to  insure  reliability  and  thoroughness, 
and  not  to  publicly  discredit  the  entire  force,  and  belittle  the 
service  as  he  did  on  the  occasion  referred  to,  by  creating  in  the 
public  mind  a  false  standard  of  measurement  of  the  service  as  a 
whole  by  the  exceptional  deficiencies  of  a  very  small  percentage 
of  the  total  number  of  examiners  employed. 

In  an  interview  subsequently  published  in  the  Journal  of 
Commerce  and  Commercial  Bulletin,  Mr.  Murray  is  quoted  as 
stating : 

We  want  better  bank  examiners  in  place  of  some  now 
in  the  service  who,  after  years  of  experience,  do  not 
measure  up  to  the  work  and  never  will  *  *  *  We  want 


ROMANCE  AND  TRAGEDY  OF  BANKING  333 

examiners  with  courage  to  tell  any  bank  when  it  is  doing 
wrong  and  with  strength  of  character  enough  to  force  a 
correction. 

This  interview  was  brought  to  the  attention  of  President  Taft, 
who,  under  date  of  January  9,  1911,  wrote  Mr.  Murray  a  note 
referring  to  this  statement  and  suggesting  that  he  furnish  the 
Secretary  of  the  Treasury  with  the  names  of  "those  bank  exam- 
iners who  are  not  up  to  the  mark,"  for  removal  from  the  service. 

No  such  list  was  ever  furnished  the  Secretary  of  the  Treas- 
ury by  Mr.  Murray,  nor  was  it  necessary  for  him  to  obtain  the 
Secretary's  consent  to  remove  an  incompetent  examiner,  as  the 
Comptroller  was  vested  with  authority  to  do  so  on  his  own 
responsibility. 

With  no  disposition  to  harshly  criticise  Mr.  Murray  or  his 
methods,  or  to  excuse  or  defend  inefficiency  or  superficiality  in 
the  work  of  any  examiner,  justice  to  a  body  of  intelligent,  com- 
petent and  conscientious  public  service  employees,  whose  compen- 
sation, with  few  exceptions,  was  not  commensurate  with  their 
responsibilities  or  the  arduousness  of  their  duties,  demands  that 
the  public  mind  be  disabused  of  any  false  impressions  concerning 
them  as  a  result  of  Mr.  Murray's  indiscriminate  and  indiscreet 
remarks. 

This  defense  of  the  examiners  then  employed  is  not  based 
upon  a  superficial  knowledge  of  their  work,  but  rests  upon  the 
experience  of  many  years  and  a  daily  examination  of  their  reports 
and  supervision  of  the  correspondence  with  the  banks  growing 
out  of  such  reports. 

The  National  Monetary  Commission 

The  Act  of  May  30,  1908,  known  as  the  "Emergency  Cur- 
rency Act,"  provided  for  a  National  Monetary  Commission,  to 
be  composed  of  nine  members  of  the  Senate,  to  be  appointed  by 
the  presiding  officer  of  the  Senate,  and  nine  members  of  the  House 
of  Representatives,  to  be  appointed  by  the  Speaker  of  the  House. 

This  Commission  was  authorized  to  inquire  into  and  report 
to  Congress  what  changes  were  necessary  or  desirable  in  the  mone- 


334  ROMANCE  AND  TRAGEDY  OF  BANKING 

tary  system  of  the  United  States,  or  in  the  laws  relating  to  bank- 
ing and  currency. 

During  the  interim  between  Mr.  Murray's  qualification  as 
Comptroller  and  the  date  he  assumed  charge  of  the  Currency 
Bureau,  the  National  Monetary  Commission  requested  the  Secre- 
tary of  the  Treasury  to  have  prepared  for  consideration  of  the 
Commission  such  recommendations  for  amendments  to  the  na- 
tional banking  laws  as  experience  in  the  administration  of  the 
laws  had  shown  to  be  necessary.  In  the  absence  of  Mr.  Murray, 
the  Deputy  Comptroller  of  the  Currency,  who  was  Acting  Comp- 
troller, was  requested  by  the  Secretary  to  prepare  these  recom- 
mendations. They  were  prepared  and  delivered  to  the  Secretary 
early  in  August,  1908,  but  were  not  formally  submitted  to  the 
Commission  until  December  2,  1908,  at  its  first  meeting  in  Wash- 
ington. 

About  a  week  before  the  meeting,  Mr.  Murray  received  notice 
from  the  Secretary  of  the  Treasury  that  the  Commission  desired 
him  to  appear  in  person  before  it  and  explain  these  recommenda- 
tions, but  as  they  had  been  prepared  before  he  assumed  active 
charge  of  the  Bureau,  he  requested  the  Deputy  Comptroller  to 
present  and  explain  them. 

Such  of  these  recommendations  as  contemplated  imposing 
greater  restrictions  on  the  banks  in  some  respects,  and  increasing 
the  supervisory  powers  of  the  Comptroller  along  certain  lines, 
it  was  assumed  would  not  meet  with  the  approval  of  all  of  the 
members  of  the  Commission,  particularly  those  who  were  con- 
nected with  national  banks,  or  the  bankers  who  were  present  by 
invitation  at  the  hearing.  Notwithstanding  this  fact,  however, 
the  request  of  the  Commission  was  for  the  submission  of  such 
recommendations  for  amendments  to  the  banking  laws  as  experi- 
ence in  their  administration  had  shown  to  be  necessary,  and  not 
for  such  recommendations  as  would  be  acceptable  to  the  Com- 
mission or  the  bankers.  The  more  important  of  those  that  were 
submitted  were  prepared,  therefore,  wholly  from  the  point  of 
view  of  the  better  security  of  the  creditors  of  the  banks  and  not 
from  the  viewpoint  of  extending  to  the  banks  greater  privileges. 

While,  as  stated,  it  was  expected  that  some  of  the  suggested 
amendments  to  the  law  would  not  be  received  with  favor  by  some 


ROMANCE  AND  TRAGEDY  OF  BANKING  335 

of  the  members  of  the  Commission,  opposition  on  the  part  of  the 
Comptroller  was  not  anticipated.  But  Mr.  Murray,  who  was 
present  at  the  hearing,  interposed  many  objections  to  the  pro- 
posed amendments.  As  he  had  expressed  no  dissent  to  any  of 
the  recommendations  previous  to  his  appearance  before  the  Com- 
mission on  the  occasion  stated,  his  attitude  on  that  occasion  was 
a  surprise  to  everyone  present,  and  very  embarrassing  to  the 
Deputy  Comptroller,  who  was  placed  in  the  position  of  appearing 
before  the  distinguished  body  of  men  composing  the  National 
Monetary  Commission  and  the  representative  bankers  present, 
and  presenting  recommendations  for  amendments  to  the  banking 
laws  which  did  not  meet  with  the  approval  of  his  official  superior. 

If  there  were  any  differences  of  opinion  between  the  Comp- 
troller and  his  official  subordinates  in  regard  to  the  amendments 
to  the  banking  laws  that  were  deemed  necessary,  the  place  to  have 
adjusted  such  differences  was  in  the  Treasury  Department  and 
not  before  the  National  Monetary  Commission.  Mr.  Murray  had 
ample  time  and  opportunity  to  have  done  this.  For  some  time 
before  the  meeting  of  the  Commission,  he  had  in  his  possession  a 
copy  of  the  proposed  amendments  and  if  they  did  not  meet  with 
his  approval  it  was  his  privilege  to  have  discarded  them  in  whole 
or  in  part  and  to  have  prepared  others  embodying  his  own  views. 
But  he  neither  prepared  recommendations  of  his  own  nor  con- 
ferred with  his  official  subordinates  in  regard  to  those  that  had 
been  prepared,  and  the  first  and  only  expression  of  opinion  heard 
from  him  on  the  subject  was  when  he  interposed  his  numerous 
objections  before  the  Commission.  But  the  recommendations  that 
he  dissented  to  on  that  occasion  he  subsequently  gave  the  stamp 
of  his  official  approval  by  endeavoring  to  put  them  in  force  by 
administrative  regulation,  without  authority  of  law,  and  publicly 
claimed  credit  therefor  as  part  of  his  administrative  reforms. 

Notwithstanding  the  objections  raised  either  by  Mr.  Murray 
or  members  of  the  Commission  to  the  amendments  to  the  banking 
laws  suggested  at  that  time,  the  more  important  of  such  amend- 
ments as  have  not  since  been  adopted  are  still  considered  proper 
and  necessary,  and  their  enactment  into  law  would  enable  the 
Comptroller  in  a  lawful  manner  to  correct  or  regulate  some  of 
the  dangerous  conditions  which  are  found  in  banks,  and  other- 


336  ROMANCE  AND  TRAGEDY  OF  BANKING 

wise  greatly  improve  the  effectiveness  of  administrative  super- 
vision. 

It  is  unnecessary  to  reproduce  in  this  volume  or  to  review  in 
detail  the  amendments  to  the  banking  laws  that  were  recommended 
to  the  National  Monetary  Commission  at  that  time,  as  these  will 
be  found  in  full  by  anyone  who  desires  to  read  them  in  Senate 
Document  No.  404,  Sixty-first  Congress,  Second  Session,  issued 
by  the  Commission.  But  reference  will  be  made  to  the  most  im- 
portant of  the  proposed  amendments  and  such  as  were  the  sub- 
ject of  discussion  and  opposition. 

The  first  recommendation  submitted  for  consideration  was  for 
a  change  in  the  method  of  compensating  national  bank  examiners 
from  a  fee  basis  to  an  annual  salary  and  expenses,  but  while  the 
inadequacy  of  the  fee  system  of  compensation  was  generally  ad- 
mitted, the  proposed  change  did  not  meet  with  the  approval  of  the 
bankers  present  at  the  hearing,  principally,  if  not  wholly,  because 
of  the  fear  of  an  increased  cost  to  the  banks.  This  change  in  the 
law  was  made  by  the  Federal  Reserve  Act  of  December  23,  1913. 

When  Mr.  Murray  assumed  charge  of  the  Currency  Bureau, 
he  was  imbued  with  the  idea  that  the  national  bank  examiners  as 
a  body  were  a  bad  lot  and  that  their  work  was  faulty  in  the  ex- 
treme, due,  as  he  thought  and  publicly  expressed,  on  the  one  hand 
to  incompetency  and  on  the  other  to  a  proneness  to  acquire  fees 
at  the  expense  of  thoroughness  in  their  work  rather  than  to  re- 
main in  banks  long  enough  to  learn  to  a  reasonable  certainty  their 
true  condition. 

Fee  System  of  Compensation 

The  fee  system  of  compensation  of  national  bank  examiners 
was  principally,  if  not  wholly,  responsible  for  the  impression  that 
prevailed,  and  which  the  indiscriminate  remarks  of  Mr.  Murray 
intensified,  that  examinations  were  made  too  hurriedly  and  that 
to  this  fact  was  due  the  failure  of  examiners  in  the  past  in  some 
instances  to  discover  the  conditions  to  which  Mr.  Murray  alluded 
in  his  excoriating  address  at  the  time  of  the  examiners'  meeting 
in  Washington. 

Failure  to  discover  defalcations,  embezzlements  or  other  crim- 
inal wrongdoing  through  several  successive  examinations,  as  al- 


ROMANCE  AND  TRAGEDY  OF  BANKING  337 

leged  by  Mr.  Murray,  because  of  the  fact  that  the  examiner  did 
not  devote  sufficient  time  to  the  examination  of  the  bank,  were 
very  rare.  Failure  to  discover  shortages  or  other  criminality 
was  due  to  other  and  varied  causes. 

But  this  does  not  alter  the  fact  that  the  fee  system  of  com- 
pensation was  inherently  wrong  and  was  conducive  to  hurried 
work.  A  competent  and  conscientious  examiner  would  render 
better  service  for  a  commensurate  compensation  than  he  could 
afford  to  give  for  an  inadequate  fee.  An  inefficient  examiner 
should  not  be  retained  in  the  service  under  any  circumstances, 
and  if  one  should  be  found,  good  administration  would  require 
that  he  be  instantly  removed  and  not  retained  to  the  discredit  of 
the  entire  force  and  the  service  which  he  represents.  It  was  un- 
reasonable to  expect  or  to  require  an  examiner  to  remain  in  a  bank 
long  enough  to  make  a  complete  audit  of  its  affairs,  extending 
over  a  period  of  several  days,  for  a  compensation  of  twenty  or 
twenty-five  dollars,  in  a  small  institution,  and  a  proportionately 
larger  fee  in  a  larger  institution,  varying  with  the  amount  of  the 
capital  of  the  association,  and  out  of  such  meagre  allowance  pay 
his  railroad  fare,  hotel  bills,  clerk  hire  and  all  other  incidental 
expenses.  The  surprising  feature  of  this  situation  was  that  the 
examiners  whose  districts  extended  over  considerable  territory, 
necessitating  constant  travel,  rendered  as  good  and  as  reliable 
services  as  the  records  of  the  Comptroller's  office  show  them  to 
have  rendered  under  the  fee  system  of  compensation. 

When  it  was  demonstrated  to  the  Commission  how  small  the 
net  compensation  of  many  of  the  examiners  was,  after  deducting 
all  expenses,  in  answer  to  a  question  by  a  member  of  the  Commis- 
sion as  to  whether  competent  examiners  could  be  obtained  for 
such  a  compensation,  Mr.  Murray  stated  that  he  had  on  file  about 
one  thousand  applications  for  appointments  and  that  every  one 
of  the  applicants,  or,  at  least,  a  majority  of  them  would  meet  the 
qualifications  required  for  such  a  compensation.  He  stated  that 
he  could  obtain  some  very  good  men  for  two  thousand  dollars  a 
year,  young  men  who  were  very  good  accountants  and  expert 
bookkeepers,  who  would  develop  into  good  examiners. 

In  making  such  a  statement,  Mr.  Murray  only  displayed  his 
ignorance  of  the  essential  qualifications  of  an  examiner.  While 


338          ROMANCE  AND  TRAGEDY  OF  BANKING 

a  knowledge  of  accounting  and  bookkeeping  is  a  necessary  requi- 
site in  the  examinations  of  banks,  there  are  other  qualifications 
far  more  important  which  are  difficult  to  find  in  a  man  who  is  will- 
ing to  accept  such  employment  for  the  meagre  compensation  of 
two  thousand  dollars  a  year  gross.  Mr.  Murray  admitted  this 
fact  further  on  in  his  testimony  before  the  commission  when  he 
inconsistently  stated  that  he  had  made  it  a  rule  since  he  became 
Comptroller  to  appoint  no  one  an  examiner  who  was  not  as  good 
a  judge  of  credits  and  had  as  fair  a  knowledge  of  modern  banking 
as  the  officers  of  the  banks  that  he  was  called  upon  to  examine. 

Experience  in  the  appointment  of  bank  examiners  has  demon- 
strated that  some  of  the  very  best  men  in  the  service  never  had 
been  employed  in  a  bank,  but  their  general  business  experience 
had  been  such  as  to  broaden  their  views  and  make  them  excellent 
judges  of  credits,  competent  to  size  up  an  unsatisfactory  situa- 
tion or  dangerous  condition  and  to  suggest  the  remedies  therefor. 

While  it  is  very  essential  for  an  examiner  to  thoroughly  under- 
stand bookkeeping  and  the  general  routine  work  of  a  bank,  the 
records  of  the  Comptroller's  office  show  that  the  man  whose  train- 
ing has  been  restricted  to  the  narrow  lines  of  a  bank  bookkeeper, 
without  other  business  experience,  does  not  develop  into  as  good 
and  as  reliable  a  judge  of  credits  as  quickly,  if  at  all,  as  the  man 
of  broad  business  experience  with  no  previous  bank  training.  The 
latter  easily  learns  the  details  of  bookkeeping  and  the  routine 
work  of  the  bank,  while  it  is  difficult  for  the  former  to  reach  the 
standard  of  good  judgment  and  discretion  which  the  latter 
possesses. 

Adherence  to  the  rule,  therefore,  to  appoint  no  one  a  bank 
examiner  who  had  not  had  a  banking  experience,  which  Mr.  Mur- 
ray declared  would  be  his  policy  while  Comptroller,  but  which  he 
did  not  adhere  to,  would  deprive  the  service  of  a  class  of  men  such 
as  described,  who  in  a  number  of  instances  have  proven  to  be  first- 
class  examiners  and  the  most  efficient  men  in  the  service. 

The  principal  qualifications  an  examiner  should  possess  to 
insure  his  rising  above  the  average  accountant  are  force  of  char- 
acter, resourcefulness  and  good  judgment.  If  an  examiner  does 
not  possess  these  qualities  and  cannot  cultivate  them,  he  may  be 


ROMANCE  AND  TRAGEDY  OF  BANKING  339 

an  expert  bookkeeper  and  an  excellent  accountant,  but  he  never 
will  rise  above  the  ordinary  in  this  line  of  work. 

It  was  difficult  to  attract  to  or  retain  in  the  service  the  type 
of  men  who  make  the  best  examiners  on  account  of  the  meagre 
compensation  allowed  under  the  fee  system.  Men  of  this  class 
were  found  to  be  engaged  as  auditors  or  public  accountants,  re- 
ceiving a  much  higher  rate  of  compensation  than  examiners  re- 
ceived for  the  same  class  of  service,  and  neither  the  Comptroller  of 
the  Currency  nor  anyone  else  could  employ  such  men  at  a  net 
compensation  of  two  thousand  dollars  a  year. 

Mr.  Murray  made  the  further  statement  before  the  commis- 
sion, in  connection  with  the  suggestion  that  examiners  be  placed 
under  the  civil  service,  that  while  he  was  a  strong  believer  in  the 
competitive  examination  system  as  a  test  of  fitness  for  public 
service,  he  doubted  very  much  whether  by  any  system  of  examina- 
tion an  applicant's  qualifications  for  employment  as  a  national 
bank  examiner  could  be  reliably  determined.  He  said  an  exam- 
iner must  have  some  presence.  He  must  have  good  judgment. 
He  must  have  tact,  and  these  cannot  be  determined  by  his  ability 
to  answer  questions. 

Mr.  Cortelyou,  who  was  Secretary  of  the  Treasury  at  that 
time,  injected  some  sensible  views  into  the  discussion  of  this  sub- 
ject. He  stated  that  his  experience  had  been  that  it  was  not  pos- 
sible to  devise  an  examination  that  would  extend  much  beyond  the 
mere  technical  qualifications  as  determining  the  fitness  of  an  ap- 
plicant to  satisfactorily  discharge  the  duties  of  a  bank  examiner. 
He  said  that  a  high  school  or  college  graduate  might  demonstrate 
his  ability  tp  pass  a  satisfactory  examination  as  an  expert  in 
figures  and  otherwise,  but  by  no  means  could  his  personal  integ- 
rity, his  discretion  and  his  good  judgment,  characteristics  so 
vitally  essential  in  a  national  bank  examiner,  be  determined  by 
examination.  He  stated  further,  in  answer  to  a  question  by  a 
member  of  the  Commission,  that  he  would  have  to  part  company 
with  Mr.  Murray  on  the  proposition  that  good  judgment  as  to 
credits  could  be  obtained  for  a  compensation  of  $2,000  or  even 
$5,000  a  year. 

The  recommendation,  therefore,  that  the  banking  laws  be 
amended  so  as  to  place  examiners  on  a  salary  and  expense  basis 


340          ROMANCE  AND  TRAGEDY  OF  BANKING 

of  compensation,  instead  of  a  fee  allowance,  as  at  that  time,  in 
order  to  correct  some  of  the  conditions  for  which  the  fee  system 
was  admitted  by  all  to  be  largely  responsible,  did  not  receive  the 
favorable  consideration  of  the  Commission,  and  principally  be- 
cause the  bankers  who  were  present  were  unwilling  that  the  banks 
should  bear  the  increased  cost  of  examinations  that  a  change  from 
a  fee  to  a  salary  and  expense  allowance  would  be  likely  to  entail. 
The  fee  system,  with  all  its  defects,  was  therefore  continued  until 
the  passage  of  the  Federal  Reserve  Act,  which  placed  the  exam- 
iners on  a  salary  and  expense  basis. 

The  next  recommendation  to  the  Commission,  which  developed 
considerable  discussion,  but  apparently  little  favor,  was  the  pro- 
posed amendment  of  Section  5200  of  the  Revised  Statutes,  re- 
lating to  the  limit  of  loans  that  the  banks  may  make. 

This  recommendation  is  considered  of  sufficient  importance  to 
warrant  its  reproduction  in  full,  and  was  as  follows: 

This  section  excepts  from  the  limit  of  loans  the  dis- 
count of  bills  of  exchange  drawn  against  actually  existing 
values,  and  commercial  paper  actually  owned  by  the  person 
negotiating  the  same. 

The  evident  purpose  of  these  exceptions  was  to  facili- 
tate trade  by  enabling  the  owner  of  such  paper  to  realize 
on  it  at  once,  instead  of  tying  his  capital  up  until  the 
maturity  of  the  paper  or  the  collection  of  the  draft  and 
the  remittance  of  the  proceeds.  But  in  facilitating  trade 
by  permitting  the  discount  of  such  paper  without  restriction 
as  to  the  aggregate  in  any  one  case,  and  in  addition  thereto 
allowing  the  same  person  or  interest  to  become  liable  at 
the  same  time  for  money  borrowed  to  an  amount  equal  to 
the  limit  of  a  loan  that  a  bank  may  lawfully  make,  the 
security  of  the  depositor,  whose  funds  were  used  in  such 
transactions,  is  left  entirely  to  the  judgment  and  discretion 
of  the  officers  of  the  bank. 

It  is  just  as  essential  to  the  safety  of  a  bank  and  the 
security  of  its  creditors  that  the  discount  of  commercial 
paper  and  bills  of  exchange  be  kept  within  prudent  limits 
as  it  is  to  restrict  the  amount  of  a  loan  that  may  be  made 
to  any  one  person  or  interest.  More  bank  failures  have 
resulted  from  the  excessive  concentration  of  funds  in  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  341 

hands  of  single  or  allied  interests  than  from  all  other  causes 
combined.  It  matters  not,  so  far  as  the  security  of  such 
funds  is  concerned,  whether  the  liabilities  consist  of  direct 
loans  made  in  excess  of  the  limit  in  violation  of  the 
statutory  restriction  or  the  discount  of  commercial  or  busi- 
ness paper  beyond  the  limits  of  prudence  and  safety,  but 
within  statutory  authority. 

Realizing  the  dangers  of  such  a  situation,  administra- 
tive regulation  has  endeavored  to  supply  a  protection  to 
the  depositor,  which  the  law  does  not  afford  him,  by  in- 
sisting that  the  aggregate  liabilities  of  any  person,  or  of 
any  company,  corporation,  or  firm,  or  allied  interests,  for 
discounted  commercial  paper  or  bills  of  exchange  shall  be 
kept  within  the  limits  of  pudence  and  safety,  but  as  there 
is  no  authority  of  law  to  support  such  regulation  when 
disregarded,  appeal  can  be  made  only  to  the  conservative 
judgment  of  the  directors  of  the  bank  as  to  the  dangers 
attending  such  a  policy. 

Unfortunately  for  the  welfare  of  the  bank,  such  admoni- 
tions are  too  frequently  unheeded.  Disaster  finally  overtakes 
the  individual  or  enterprise,  and  the  bank  meets  with  losses 
which  impair  its  capital  or  produce  a  condition  of  insol- 
vency and  then  only  was  the  Comptroller  of  the  Currency 
vested  with  power  to  take  decisive  action. 

This  section  should  be  amended  so  as  to  place  a  limit- 
ation upon  the  aggregate  liabilities  of  any  person,  company, 
corporation  or  firm  for  money  borrowed  and  for  dis- 
counted commercial  paper  and  bills  of  exchange.  This 
limitation  should  be  based  upon  a  percentage  of  the 
total  loans  and  discounts  of  the  bank.  This  would  cause 
a  wider  distribution  of  the  loans  and  discounts  of  a  bank, 
and  tend  to  prevent  such  concentrations  of  funds  as  are 
frequently  found,  which  endanger  the  solvency  of  the  as- 
sociation. 

A  specific  penalty  should  also  be  provided  for  violation 
of  this  section,  enforceable  against  the  officers  or  directors 
responsible  for  such  violation,  in  addition  to  the  general 
penalty  of  forfeiture  of  the  charter  of  the  association 
now  provided  for  any  violation  of  the  bank  act.  The 
individual  and  not  the  corporation  should  be  punished  in 
such  cases. 


342          ROMANCE  AND  TRAGEDY  OF  BANKING 
The  original  bank  act  of  1863  provided : 

That  the  total  liabilities  of  any  person,  or  of  any  com- 
pany or  firm  (including  in  the  liabilities  of  the  company 
or  firm  the  liabilities  of  the  several  members  thereof)  to 
any  association,  including  liabilities  as  acceptor  on  bona 
fide  bills  of  exchange,  payable  out  of  the  State  where  the 
association  is  located,  shall  at  no  time  exceed  one-third; 
exclusive  of  liabilities  as  acceptor,  one-fifth;  and  exclusive 
of  the  liabilities  on  such  bills  of  exchange,  one-tenth  part 
of  the  amount  of  the  capital  stock  of  such  association 
actually  paid  in. 

While  this  section  of  the  original  bank  act  was  very  ambigu- 
ously drawn,  it  fixed  a  limitation  upon  the  discount  of  bills  of 
exchange  and  in  that  respect  was  better  than  the  present  law. 
The  Act  of  June  3,  1864,  which  repealed  the  Act  of  1863,  wiped 
out  this  limitation,  and  the  banks  since  the  former  date  have  been 
allowed  to  discount  business  or  commercial  paper  and  bills  of  ex- 
change without  any  restriction  as  to  the  aggregate  amount  in  any 
one  case,  or  of  any  one  kind  or  class. 

Until  there  is  a  restriction  placed  by  law  upon  the  amount  of 
business  paper  of  any  one  person,  firm,  company  or  corporation 
that  may  be  discounted  by  a  bank,  and  the  law  defines  specifically 
what  kind  of  paper  shall  come  within  this  classification,  just  so 
long  will  some  banks  exceed  the  limits  of  prudence  and  safety  in 
discounting  for  single  or  affiliated  interests  and  endanger  the 
solvency  of  the  association. 

The  unsatisfactory  and  frequently  dangerous  conditions  that 
have  been  found  in  banks,  as  a  result  of  this  provision  of  law, 
which  the  amendment  proposed  to  the  National  Monetary  Com- 
mission was  intended  to  correct  and  regulate,  may  best  be  exem- 
plified by  the  following  illustrations  of  actual  cases  in  point  in 
one  bank  of  each  class  with  a  capital  stock  varying  in  amount 
from  $25,000  to  $1,000,000. 


ROMANCE  AND  TRAGEDY  OF  BANKING 


343 


$4,000.00 
105,209.96 

$109,209.96 


$70,000.00 


1 .     Capital    $25,000.00 

Surplus     15,000.00  $40,000.00 

Deposits     $190,000.00 

Loans     and     discounts 200,000.00 

Total  assets    250,000.00 

Legal  limit  of  a  loan 4,000.00 

Indebtedness  of  one  company,  the  president 
of  which  was  president  of  the  bank: 

Direct    loan     

Commercial    paper     

2.  Capital      $50,000.00 

Surplus     20,000.00 

Deposits   $377,000.00 

Loans    and    discounts 325,000.00 

Total    assets    197,000.00 

Legal  limit  of  a  loan 7,000.00 

Indebtedness  of  the  president: 

Direct    loan     

Accommodation  notes  and  loans  to  companies 
controlled  by  him 

3.  Capital    $100,000.00 

Surplus     50,000.00 

Deposits      $567,000.00 

Loans    and    discounts 483,000.00 

Total    assets    827,000.00 

Legal  limit  of  a  loan 15,000.00 

Indebtedness  of  cashier: 

Direct    loan    $9,900.00 

Accommodation   notes   and    loans   to   concerns 

controlled  by  him 215,000.00 


6,967.00 

75,032.00 

$81,999.00 

$150,000.00 


$224,900.00 


344 


ROMANCE  AND  TRAGEDY  OF  BANKING 


$15,000.00 

860,563.00 
$375,563.00 

$260,000.00 


4.  Capital      $150,000.00 

Surplus     100,000.00  $250,000.00 

Deposits      $858,000.00 

Loans   and   discounts 1,017,000.00 

Total     assets     1,878,550.00 

Legal  limit  of  a  loan 25,000.00 

Indebtedness  of  one  company,  in  which  the 
president  of  the  bank  was  interested: 

Direct    loan    

Indirect  indebtedness,  consisting  of  com- 
mercial paper  and  loans  to  subsidiary 
companies  

5.  Capital      $200,000.00 

Surplus     60,000.00 

Deposits      $1,545,500.00 

Loans    and    discounts 1,508,000.00 

Total     assets     2,078,000.00 

Legal    limit    of    a    loan 26,000.00 

Indebtedness  of  one  company: 

Direct    loan 

Commercial  paper  and  loans  to  subsidiary 
companies  

6.  Capital      $400,000.00 

Surplus     150,000.00 

Deposits   $2,150,000.00 

Loans  and  discounts    2,158,000.00 

Total     assets     3,427,000.00 

Legal   limit   of   a   loan 55,000.00 

Indebtedness  of  one  firm: 

Direct    $40,000.00 

Indirect — accommodation   notes    and    loans    to 

subsidiary    concerns     279,000.00 


$10,000.00 

345,454.00 

$355,454.00 

$550,000.00 


$319,000.00 


ROMANCE  AND  TRAGEDY  OF  BANKING  345 

7.     Capital    $1,000,000.00 

Surplus     200,000.00  $1,200,000.00 

Deposits     $13,400,000.00 

Loans    and    discounts 7,100,000.00 

Total     assets      22,000,000.00 

Legal    limit    of    a    loan 120,000.00 

Indebtedness  of  president: 

Direct    

Indirect — accommodation    and   advance   to    his 

companies    $7,776,000.00 

The  foregoing  are  fair  examples  of  the  imprudent  concen- 
tration of  loans  which  may  be  found  in  many  banks  resulting 
from  the  excessive  discounting  of  commercial  or  business  paper, 
so  called,  for  single  interests,  and  in  many  instances  while  such 
paper  takes  the  form  of  trade  paper  excepted  from  the  limit  of 
loans  it  consists  of  nothing  but  accommodation  notes  made  for 
the  purpose  of  indirectly  borrowing  money. 

Senator  Knox,  a  member  of  the  National  Monetary  Commis- 
sion at  the  time  this  matter  was  under  discussion,  seemed  to  think 
that  inasmuch  as  the  banks  did  not  violate  the  law  by  discounting 
commercial  or  business  paper  to  such  an  imprudent  extent  as  to 
jeopardize  the  safety  of  the  institution,  it  was  not  incumbent 
upon  the  Comptroller  of  the  Currency  to  concern  himself  about 
such  conditions,  and  that  if  disaster  should  overtake  the  associa- 
tion he  would  not  be  held  accountable.  This  was  a  very  com- 
placent view  to  take  of  the  matter.  It  is  the  banker's  way  of 
looking  at  it,  but  certainly  should  not  be  the  Comptroller's,  if 
the  safety  of  the  institution  is  to  be  considered  in  the  exercise  of 
his  supervisory  powers.  It  was  assumed  in  the  preparation  of 
the  recommendations  for  amendment  to  the  laws  that  the  Commis- 
sion desired  to  strengthen  the  weak  places  in  the  statutes  and 
thus  increase  the  security  of  the  creditors  of  the  banks,  and  no 
provision  of  the  statute  was  weaker  or  more  responsible  for  the 
conditions  which  result  in  large  losses  and  frequently  insolvency, 
and  needed  strengthening  more  than  the  provision  which  permits 
the  discounting  of  business  and  commercial  paper  without  limit 


346          ROMANCE  AND  TRAGEDY  OF  BANKING 

as  to  the  aggregate  of  any  one  class,  except  the  judgment  or 
discretion  of  the  bank's  officers. 

Mr.  Padgett,  a  member  of  the  Commission,  stated  that  in 
England,  France  and  Germany  there  is  absolutely  no  Government 
inspection  of  the  banks,  and  no  regulation  whatever  in  respect  to 
their  loans,  while  in  this  country  the  tendency  is  toward  increas- 
ing inspection  and  regulation. 

If  all  the  national  banks  in  this  country  were  as  well  and  as 
conservatively  managed  as  the  banks  that  were  represented  by 
the  bankers  who  were  present  at  the  hearing  before  the  Monetary 
Commission,  or  were  members  of  that  Commission,  no  additional 
restrictive  legislation  or  increased  supervisory  powers  would  be 
necessary.  It  might  be  perfectly  safe  to  let  the  banks  be  man- 
aged by  their  directors  and  officers,  without  governmental  inter- 
ference, in  the  confidence  that  they  would  be  well  and  conserva- 
tively managed  in  the  best  interests  of  their  stockholders  and  the 
safety  of  their  depositors.  But,  unfortunately,  such  is  not  the 
case,  and  never  will  be,  and  in  order  to  regulate  and  effectively 
supervise  the  banks  that  most  need  regulation  and  supervision, 
the  additional  restrictive  measures  and  increased  supervisory 
powers  recommended  at  that  hearing  were  considered  necessary, 
and  until  there  is  a  statutory  limitation  placed  upon  the  total 
liabilities  for  discounted  commercial  or  business  paper  and  bills 
of  exchange,  of  any  one  person,  company,  firm  or  corporation, 
there  will  be  injudicious  and  imprudent  banking  and  bank  failures 
resulting  from  too  great  a  concentration  of  loans  and  discounts 
in  the  hands  of  affiliated  interests. 

If  the  English,  German  or  French  policy,  referred  to  by  Mr. 
Padgett,  of  letting  the  banks  alone  to  be  managed  by  their  direc- 
tors and  officers  without  governmental  supervision,  were  intro- 
duced in  this  country,  it  would  also  become  necessary  to  adopt 
the  Chinese  penalty  of  decapitation  as  a  punishment  for  bank 
wreckers. 

The  experienced  and  conservative  banker  does  not  need  legis- 
lative restrictions  to  guide  him  in  determining  the  line  of  credit 
to  be  extended  to  any  borrower.  The  aggregate  liabilities  of  every 
customer  for  direct  loans  and  indirect  obligations  as  endorser  or 
guarantor,  are  measured  by  such  bankers  not  by  statutory  regu- 


ROMANCE  AND  TRAGEDY  OF  BANKING  347 

lations  but  by  the  borrower's  known  financial  responsibility.  Un- 
fortunately, however,  all  bankers  are  not  so  constituted, 
consequently  as  long  as  some  banks  are  managed  and  dominated 
by  men  of  speculative  tendencies,  or  optimistic  or  defective  busi- 
ness judgment  and  of  uncertain  or  questionable  integrity,  just 
so  long  will  it  be  necessary  to  regulate  and  control  their  opera- 
tions by  well-defined  laws  and  limitations. 

That  the  weak  places  in  the  national  banking  laws  were  not 
strengthened  from  time  to  time  to  afford  better  protection  to 
depositors  and  stockholders  in  the  banks,  and  amended  to  meet 
new  and  constantly  changing  conditions  in  banking,  was  because 
of  the  fact  that  the  recommendations  made  by  the  several  Comp- 
trollers of  the  Currency  since  the  establishment  of  the  system  did 
not  receive  at  the  hands  of  Congress  the  consideration  they 
should  have  received. 

Of  the  numerous  amendments  to  the  national  banking  laws 
that  have  been  adopted  since  the  enactment  of  the  original  Act 
of  1863,  practically  all  have  been  in  the  interest  of  greater  lati- 
tude or  privileges  to  the  banks.  Whatever  safeguards  have  been 
adopted  in  the  way  of  increasing  the  security  of  creditors  have 
been  of  the  nature  of  administrative  regulations.  Opposition  to 
additional  restrictive  legislation  or  increased  supervisory  powers 
has  almost  invariably  come  from  the  bankers  of  the  country  whose 
institutions  would  not  be  affected  in  the  least  by  such  legislation, 
except  to  be  benefited  to  the  extent  that  such  legislation  would 
be  an  additional  insurance  of  the  banking  interests  of  their 
respective  communities  against  disturbance. 

Penitentiaries  are  provided  and  maintained  for  criminals  and 
those  who  disregard  the  civil  and  property  rights  of  others. 
Police  regulations  are  necessary  for  the  protection  of  law-abiding 
citizens.  But  it  does  not  follow  that  because  the  great  majority 
of  citizens  of  every  community  are  peaceful,  law-abiding  and  con- 
siderate of  the  rights  of  their  fellow-man,  penitentiaries  and 
police  regulations  are  not  necessary.  The  law-abiding  citizen 
is  not  affected  or  interfered  with  by  their  existence,  except  that 
he  is  taxed  for  their  maintenance,  but  the  fact  that  they  do  exist 
insures  to  him  freedom  from  disturbance  in  the  full  enjoyment 
and  exercise  of  his  individual  rights  without  interference,  so  long 


348          ROMANCE  AND  TRAGEDY  OF  BANKING 

as  he  does  not  encroach  upon  or  jeopardize  the  rights  or  property 
of  others. 

So  would  it  be  with  the  additional  restrictions  that  have  been 
recommended  by  Comptrollers  of  the  Currency  from  time  to  time 
for  the  better  security  of  the  depositors  and  other  creditors  of 
the  national  banks.  Their  adoption  would  have  contributed 
largely  toward  the  prevention,  or  at  least  the  amelioration  of 
numerous  disturbances  to  the  banking  and  business  interests  of 
a  community  resulting  from  the  failure  of  banking  institutions 
managed  by  men  of  the  class  heretofore  described,  who  needed 
just  such  restrictions  to  control  the  conduct  of  their  business  as 
some  of  the  proposed  amendments  to  the  banking  laws  contem- 
platedj  and  which  the  conservative  and  successful  banker  who 
does  not  need  them,  selfishly  or  short-sightedly  opposed. 

A  bank  failure,  no  matter  from  what  cause,  is  demoralizing 
to  any  community,  but  when  such  failures  result  from  the  exces- 
sive concentration  of  loans  to  one  individual  or  concern,  or  an 
affiliation  of  interests  in  the  form  of  discounted  commercial  or 
business  paper,  the  law  is  as  much  responsible  for  permitting 
such  imprudent  and  undue  extension  of  credit  as  the  directors 
of  the  bank  who  authorized  the  loans  and  discounts  to  be  made. 

The  next  most  important  amendment  recommended  related 
to  the  impairment  of  capital  of  the  banks  and  the  manner  in 
which  the  law  required  such  impairment  to  be  made  good. 

The  law  in  this  respect  is  as  defective  as  the  statute  relating 
to  the  limit  of  loans.  The  amendment  proposed  pointed  out  the 
defects  and  suggested  the  remedies,  and  was  as  follows: 

If  a  bank's  capital  becomes  impaired  wholly  or  in  part 
by  losses,  the  law  requires  such  impairment  to  be  made  good 
by  a  stock  assessment  within  three  months  from  the  date 
of  receipt  by  the  directors  of  notice  from  the  Comptroller 
of  the  Currency,  or  the  alternative  of  placing  the  associa- 
tion in  liquidation.  Inability  or  refusal  to  do  either  within 
the  prescribed  time  subjects  the  bank  to  a  receivership. 

There  is  an  inconsistency  between  this  provision  of 
law  and  section  4  of  the  Act  of  June  30,  1876.  While  the 
former  requires  the  capital  to  be  made  good  within  three 
months  in  order  to  escape  a  receivership,  the  latter  re- 


ROMANCE  AND  TRAGEDY  OF  BANKING  349 

quires  the  stock  of  any  shareholder  who  fails  to  pay  his 
proportion  of  the  assessment  within  that  time  to  be  ad- 
vertised for  a  period  of  thirty  days  after  the  expiration 
of  the  three  months  before  it  can  be  sold  by  the  directors 
to  make  good  the  deficiency.  The  directors  can  not,  there- 
fore, enforce  payment  of  the  assessment  on  delinquent 
stock  under  four  months  from  the  date  of  receipt  of  the 
notice  of  impairment. 

These  provisions  of  law  are  also  frequently  responsible 
for  the  unsatisfactory  conditions  which  are  found  to  exist 
in  banks,  which  the  Comptroller  is  powerless  to  correct. 
Pending  the  collection  of  an  assessment  to  make  good  an 
impairment  of  capital,  the  association  remains  in  the  hands 
of  the  same  management  responsible,  in  many  cases,  for 
the  losses,  either  through  incompetency,  speculation,  or 
otherwise.  Depositors  continue  to  put  their  money  in  the 
bank  to  be  loaned  or  invested  and  perhaps  lost  or  im- 
periled in  a  like  manner. 

There  have  been  a  number  of  instances  in  the  past,  and 
there  no  doubt  will  be  others  in  the  future,  when  it  would 
have  been  and  will  be  for  the  best  interests  of  all  concerned 
to  temporarily  close  the  doors  of  an  association  whose 
capital  becomes  badly  impaired,  instead  of  requiring  inno- 
cent stockholders  to  risk  additional  capital  in  the  hands  of 
an  incompetent  or  speculative  management  and  further 
imperil  the  funds  of  confiding  and  unsuspecting  depositors. 

Under  existing  law  the  Comptroller  has  no  authority  to 
exercise  his  judgment  and  discretion  in  such  cases.  Where 
he  has  reason  to  believe  that  an  assessment  can  not  be 
collected  from  stockholders  to  make  good  an  impairment 
of  capital  or  where  he  has  no  confidence  in  the  ability 
of  the  board  of  directors  to  restore  the  bank  to  a  satisfac- 
tory condition,  he  should  have  discretionary  authority  to 
close  an  association  under  such  conditions  pending  the 
reorganization  or  rehabilitation  of  its  affairs. 

While  Mr.  Murray  admitted  that  the  unsatisfactory  condi- 
tions described  were  frequently  found  to  exist  in  banks  and  that 
the  law  provided  no  adequate  means  for  their  prompt  correction, 
he  did  not  approve  of  the  remedy  proposed,  but  offered  none 
better.  He  stated  that  when  n  bank's  capital  becomes  impaired 


350          ROMANCE  AND  TRAGEDY  OF  BANKING 

it  should  be  made  good  forthwith,  but  he  dissented  to  the  sug- 
gestion that  the  Comptroller  be  authorized  to  close  the  doors  of 
such  a  bank  pending  the  restoration  of  capital  as  an  imprac- 
ticable expedient  which  would  ruin  any  bank  to  which  it  was 
applied. 

If  Mr.  Murray  had  carefully  read  and  considered  the  sug- 
gestion contained  in  this  recommendation,  as  he  should  have 
done  before  his  appearance  before  the  National  Monetary  Com- 
mission, or  if  he  had  intelligently  grasped  its  purport  when  he 
heard  it  read  at  the  hearing,  he  should  have  known  that  the  prop- 
osition did  not  contemplate  that  the  Comptroller  should  close 
every  bank  whose  capital  became  impaired  until  the  impairment 
was  made  good,  but  that  he  should  have  the  discretionary  power 
of  temporarily  closing  a  bank  when  he  had  reason  to  believe 
that  an  assessment  could  not  be  collected  from  the  stockholders 
to  restore  the  capital,  or  when  he  had  no  confidence  in  the  ability 
of  the  directors  or  the  sincerity  of  their  efforts  to  place  the 
affairs  of  the  bank  in  a  safe  and  satisfactory  condition. 

In  making  this  objection  to  the  proposed  amendment,  Mr. 
Murray  laid  great  stress  upon  the  fact  that  the  temporary  clos- 
ing of  a  bank  under  such  circumstances  would  discredit  it  in  the 
community  to  an  extent  beyond  recovery.  The  records  of  the 
Comptroller's  office  disprove  this  theory  beyond  question,  and 
show  numerous  instances  of  banks  that  have  been  temporarily 
closed  and  after  a  readjustment  of  their  affairs  and  reorganiza- 
tion of  their  board  of  directors  have  resumed  business  and  become 
stronger,  more  conservative  and  better  institutions  than  they 
were  before  their  temporary  closing,  and  rank  as  high  in  the 
confidence  of  the  community  as  any  of  their  local  competitors. 

Mr.  Murray  was  entirely  wrong,  therefore,  in  opposing  an 
amendment  to  the  law  conferring  upon  the  Comptroller  of  the 
Currency  the  discretionary  power  of  temporarily  closing  and 
taking  possession  of  an  institution  found  to  be  in  the  condition 
described. 

It  does  not  follow,  nor  did  the  recommendation  that  was  sub- 
mitted to  the  National  Monetary  Commission  assume,  that 
because  a  bank's  capital  became  impaired  there  must  necessarily 
have  been  incompetency,  speculation  or  dishonesty  in  its  man- 


ROMANCE  AND  TRAGEDY  OF  BANKING  351 

agement.  Losses  may  result  to  an  extent  sufficient  to  impair  a 
bank's  capital  from  a  variety  of  causes,  and  under  the  very  best 
and  most  conservative  management,  but  the  class  of  banks  that 
the  amendment  proposed  was  intended  to  reach,  by  vesting  cer- 
tain discretionary  powers  in  the  Comptroller,  were  those  whose 
management  had  been  shown  to  be  either  incompetent,  speculative 
or  dishonest.  The  Comptroller  should  have  the  power  to  take 
possession  of  an  association  of  this  class  when  he  finds  it  to  be 
in  an  unsafe  or  dangerous  condition,  instead  of  permitting  it  to 
drift  along  until  a  condition  of  insolvency  is  developed  before 
intervening. 

Senator  Knox  also  interposed  an  objection  to  the  granting 
of  such  discretionary  powers  to  an  administrative  officer,  and 
suggested  that  the  banking  laws  of  Pennsylvania  provided  a 
remedy  for  what  he  termed  "that  sort  of  nonsense."  Mr.  Knox 
stated  that  the  Pennsylvania  law  made  the  directors  of  a  bank 
personally  responsible  for  any  deposits  received  by  its  officers 
after  the  bank's  capital  became  impaired,  which  had  the  effect  of 
making  them  very  careful,  and  Mr.  Murray  declared  such  a  law 
to  be  a  very  good  one. 

The  Pennsylvania  law  contained  no  such  provision  as  Mr. 
Knox  alleged  or  as  Mr.  Murray  endorsed.  The  law  of  Pennsyl- 
vania at  that  time  prohibited  the  receipt  of  deposits  by  the  offi- 
cers of  a  bank  when  the  bank  was  known  to  be  insolvent,  but  not 
when  its  capital  was  impaired.  Insolvency  is  an  entirely  different 
condition,  and  the  Comptroller  is  vested  by  law  with  ample  powers 
when  such  a  situation  is  reached.  A  bank's  capital  and  surplus 
may  be  entirely  wiped  out  by  losses  and  the  association  may  still 
be  solvent.  A  bank  is  not  insolvent  until  its  capital,  surplus  and 
undivided  profits  are  entirely  absorbed  and  its  remaining  assets 
are  insufficient  to  pay  its  liabilities  to  depositors  and  other  cred- 
itors exclusive  of  stock. 

The  views  of  Senator  Knox,  as  expressed  on  that  occasion, 
and  as  endorsed  by  Mr.  Murray,  as  to  the  effectiveness  or  suf- 
ficiency of  the  remedy  proposed  by  the  former  in  its  application 
to  a  case  of  impairment  of  capital  would  not  meet  the  situation 
that  the  proposed  amendment  was  intended  to  reach.  The 
national  banking  laws  already  provided  that  if  the  directors  of 


352          ROMANCE  AND  TRAGEDY  OF  BANKING 

any  association  knowingly  violate,  or  knowingly  permit  to  be 
violated,  any  of  the  provisions  of  the  banking  laws,  they  shall 
be  held  liable  in  their  personal  and  individual  capacity  for  all 
damages  which  the  association,  its  shareholders  or  any  other 
person  shall  have  sustained  in  consequence  of  such  violations. 

In  the  class  of  banks  which  the  increased  supervisory  powers 
recommended  were  intended  to  reach  and  regulate,  the  records 
of  the  Comptroller's  office  show  that  the  losses  incurred  which 
impaired  their  capital  were  the  result  of  deliberate  violations  of 
law  for  which  the  directors  of  the  association  were  responsible 
and  consequently  were  individually  liable.  But  if  this  individual 
liability  did  not  deter  them  from  violating  the  law,  would  an 
individual  liability  for  receiving  deposits  knowing  the  capital  to 
be  impaired  stop  them  from  receiving  deposits,  as  suggested  by 
Senator  Knox?  No,  and  if  they  should  refuse  to  receive  deposits 
under  such  conditions  and  under  such  a  law,  would  not  such 
refusal  advertise  at  once  the  fact  that  the  institution  was  in  an 
unsatisfactory  condition  and  bring  about  the  very  result,  but  in 
a  worse  form,  that  Senator  Knox  and  Mr.  Murray  objected  to. 
It  would  become  necessary  under  such  circumstances  to  close  an 
institution  because  of  the  run  that  would  undoubtedly  be  made 
upon  it  by  reason  of  the  action  of  its  officers  in  refusing  to  receive 
deposits.  It  would  not  be  possible  for  the  directors  of  a  bank 
to  comply  with  such  a  provision  of  law  and  at  the  same  time  keep 
the  doors  of  the  bank  open  for  business. 

The  Comptroller  had  the  power  under  the  law  to  institute  a 
suit  to  forfeit  the  charter  of  a  bank  whose  directors  had  violated 
the  law,  but  he  had  no  power  to  bring  such  suit  for  violations 
of  law  which  injured  the  bank  committed  by  an  officer  of  the 
association  who  was  not  a  director,  when  such  violations  of  the 
statute  were  not  knowingly  permitted  by  a  director.  Neither  is 
an  officer  of  a  bank  who  is  not  a  director  individually  liable  under 
the  provision  of  the  statute  referred  to  for  any  losses  sustained 
by  his  association  in  consequence  of  violations  of  law  committed 
by  him.  He  may  be  criminally  liable,  if  his  acts  partake  of  a 
criminal  nature,  but  he  is  not  civilly  liable.  The  civil  liability 
under  this  statute  applies  only  to  directors. 


ROMANCE  AND  TRAGEDY  OF  BANKING  353 

The  recommendation,  therefore,  to  empower  the  Comptroller 
to  temporarily  close  and  take  possession  of  an  institution,  such 
as  has  been  described,  when  its  capital  became  impaired,  was  a 
very  proper  and  reasonable  suggestion  for  the  lawmakers  to  have 
considered  as  the  best  means  of  quickly  correcting  the  unsatis- 
factory conditions  in  such  an  association,  and  in  the  meantime 
protecting  the  interests  of  the  depositors  and  stockholders  from 
being  further  jeopardized  by  incompetent,  speculative  or  fraudu- 
lent management. 

In  quite  a  number  of  instances  in  the  past  the  exercise  of  such 
a  power  by  the  Comptroller  would  have  resulted  in  saving  depos- 
itors and  stockholders  from  considerable  additional  losses  in  a 
hopeless  effort  on  the  part  of  the  bank's  officers  to  recover  losses 
already  incurred  by  risking  additional  funds  in  the  same  specu- 
lative ventures. 

The  amendment  proposed,  however,  would  furnish  an  inter- 
mediate power,  which,  when  applied  with  discretion  in  exceptional 
cases,  would  result  in  saving  a  bank  and  the  depositors  and  stock- 
holders from  irreparable  losses. 

There  are  precedents  to  be  found  for  such  authority  in  the 
banking  laws  of  some  of  the  States. 

Directors'  Liabilities 

The  next  amendment  suggested  to  which  Mr.  Murray  dis- 
sented was  the  proposition  to  make  each  bank  show  in  its  pub- 
lished statements  of  condition  the  aggregate  liabilities  to  the 
association,  direct  and  indirect,  of  its  officers  and  directors. 

While  the  law  conferred  upon  the  Comptroller  of  the  Cur- 
rency the  power  to  prescribe  the  form  in  which  reports  of  condi- 
tion should  be  made,  and  required  the  publication  of  such  reports 
in  the  same  form,  no  Comptroller  ever  required  liabilities  of  the 
nature  indicated  to  be  shown  separately  in  the  published  state- 
ments of  the  banks.  They  always  were  included  with  the  loans 
and  discounts,  although  several  of  the  Comptrollers  have  admitted 
the  advisability  of  showing  such  liabilities  separately. 


354  ROMANCE  AND  TRAGEDY  OF  BANKING 

This  proposition  did  not  contemplate  the  publication  of  the 
individual  liabilities  of  the  officers  and  directors,  but  that  they 
should  be  shown  in  the  aggregate. 

When  Mr.  Murray  found  that  this  proposed  amendment  to 
the  law  did  not  meet  with  the  approval  of  the  Commission,  he 
interposed  an  objection  to  its  adoption,  stating  that  such  a 
pointed  discrimination  against  the  management  of  the  bank  would 
be  unwise.  Why  discriminate,  he  said,  against  the  officers  and 
directors  of  a  bank  whose  loans  may  be  perfectly  good,  and  let 
other  large  loans  to  the  people  not  connected  with  the  manage- 
ment go  unquestioned? 

There  is  a  vast  difference  between  the  loans  to  officers  and 
directors  of  a  bank  and  those  to  other  borrowers  not  connected 
with  the  association.  The  two  classes  of  borrowers  are  by  no 
means  in  the  same  category.  The  officers  and  directors  occupy 
the  dual  relation  of  lender  and  borrower.  They  are  the  trustees 
of  the  funds  which  they  lend  to  themselves  and  the  depositors 
and  stockholders  have  a  right  to  know  to  what  extent  they  are 
using  the  funds  entrusted  to  their  care  for  their  individual  pur- 
poses, or  for  concerns  or  interests  with  which  they  are  identified. 

No  amendment  to  the  law  would  be  more  effective  in  keeping 
such  liabilities  within  proportionate  and  prudent  limits  than  a 
requirement  for  their  publication.  The  Comptroller  had  the 
power  under  the  then  existing  law  to  require  this  to  be  done,  by 
prescribing  the  use  of  a  form  to  that  effect,  but,  as  a  rule,  Comp- 
trollers at  that  time  were  averse  to  doing  anything  unpopular, 
especially  when  the  unpopularity  was  on  the  side  of  the  banks. 
Therefore  the  law  should  be  amended  to  make  the  publication  of 
such  liabilities  mandatory  and  not  discretionary  with  the  admin- 
istrative official.  There  was  one  national  bank  in  New  York 
City,  now  out  of  existence,  which  made  a  practice  for  years  of 
publishing  its  complete  report  of  condition,  inside  and  outside, 
in  the  same  form  that  it  was  made  to  the  Comptroller,  which 
showed  such  liabilities. 

The  next  amendment  suggested  to  which  objection  was  made 
by  Mr.  Murray  was  in  relation  to  the  failure  of  national  banks 
to  maintain  their  five  per  cent,  redemption  fund  with  the  Treas- 
urer of  the  United  States.  It  was  recommended  that  the  Comp- 


ROMANCE  AND  TRAGEDY  OF  BANKING  355 

troller  be  authorized  to  appoint  a  receiver  for  any  bank  which 
neglected  or  refused  to  make  good  a  deficiency  in  this  fund  after 
due  notice. 

The  Treasurer's  office  has  experienced  a  great  deal  of  diffi- 
culty in  the  past  in  getting  banks  to  comply  with  the  law  in  this 
respect,  and  after  writing  the  delinquent  banks  a  number  of  times, 
without  effect,  to  make  good  such  deficiency,  has  had  to  appeal 
to  the  Comptroller  in  many  cases  for  assistance.  The  aggregate 
deficiency  due  the  Treasurer  from  this  source  has  at  times 
amounted  to  over  forty  millions  of  dollars  and  has  been  the 
cause  of  a  good  deal  of  annoyance. 

Mr.  Murray  was  of  the  opinion  that  the  recommendation  that 
the  Comptroller  be  authorized  to  appoint  a  receiver  for  a  bank 
which  persisted  in  ignoring  his  demand  to  make  good  the  de- 
ficiency in  this  fund  was  too  drastic  a  measure,  and  suggested  a 
fine  of  five  hundred  dollars  instead.  He  apparently  did  not  know 
or  overlooked  the  fact  that  the  law  already  authorized  the  ap- 
pointment of  a  receiver  under  such  conditions,  but  the  circum- 
locution necessary  before  such  action  could  legally  be  taken  was 
deemed  so  detrimental  to  the  interests  of  the  Government  that 
the  amendment  was  suggested  as  a  more  direct  means  of  reaching 
the  same  result.  It  was  a  simple  matter  to  impose  a  fine  on  a 
bank,  but  not  so  easy  to  collect  it.  A  suit  and  judgment  would 
probably  be  necessary  in  some  cases,  and  a  receivership  to  enforce 
the  judgment.  Any  bank  is  subject  to  a  receivership  on  the  claim 
of  a  creditor  reduced  to  judgment  which  has  remained  unsatisfied 
for  a  period  of  thirty  days,  but  the  amendment  recommended 
simply  contemplated  dispensing  with  the  delay  and  annoyance 
incident  to  a  process  of  that  nature. 

But  Mr.  Murray  had  had  no  experience  during  his  former 
connection  with  the  Comptroller's  office,  in  handling  a  situation 
of  this  kind,  as  such  questions  did  not  come  before  him  as  chief 
of  the  organization  division,  and  he  did  not  inform  himself,  as 
he  should  have  done,  as  to  the  necessity  for  or  the  purpose  of 
the  amendment  proposed  before  interposing  his  objections  at  the 
hearing  before  the  Monetary  Commission. 

The  suggestion  that  Section  5223  of  the  Revised  Statutes, 
relating  to  the  consolidation  of  national  banks,  be  amended  so 


356          ROMANCE  AND  TRAGEDY  OF  BANKING 

as  to  meet  the  growing  difficulties  which  the  Comptroller's  office 
experienced,  was  also  inadvisedly  objected  to  by  Mr.  Murray, 
who  stated  that  the  old  section  of  the  law  had  always  worked 
satisfactorily  so  far  as  he  had  ever  noticed.  Banks  had  been 
consolidated,  he  said,  for  forty  years  without  any  friction  at 
all,  one  liquidating  and  the  other  increasing  its  capital  stock. 
He  said  he  thought  the  section  had  worked  very  well. 

There  never  had  been  a  consolidation  of  a  national  bank  in 
the  history  of  the  system.  There  was  no  provision  in  the  Bank 
Act  for  consolidation  until  the  enactment  of  November  7,  1918, 
providing  for  consolidations.  Section  5223  of  the  Revised  Stat- 
utes, the  only  section  of  the  law  relating  to  the  subject,  provided 
that  when  an  association  closed  its  affairs  for  the  purpose  of 
consolidating  with  another  national  bank,  it  should  not  be  re- 
quired to  deposit  lawful  money  for  its  outstanding  circulation, 
but  its  assets  and  liabilities  were  required  to  be  reported  by  the 
absorbing  association. 

While  this  section  of  the  law  appears  to  have  contemplated 
the  merging  of  two  institutions,  it  provided  no  means  for  their 
consolidation.  The  only  way  consolidation  could  be  effected 
under  the  old  law  was  for  one  bank  to  go  into  voluntary  liquida- 
tion and  transfer  its  assets  to  the  other  association.  The  absorb- 
ing association  usually  entered  into  an  agreement  to  assume 
certain  liabilities  of  the  liquidating  bank.  If  shareholders'  inter- 
ests were  to  be  continued,  it  was  necessary  for  the  absorbing  bank 
to  increase  its  capital  stock  in  an  amount  equal  to  the  capital 
of  the  liquidating  association,  and  to  sell  the  additional  stock 
to  the  shareholders  of  the  latter.  As  the  shareholders  of  a  bank 
increasing  its  capital  had  the  common  law  right  of  participating 
pro  rata  in  an  increase  of  the  capital  of  their  association,  it 
became  necessary  to  secure  from  them  waivers  of  their  right  in 
order  to  dispose  of  the  stock  to  the  stockholders  of  the  associa- 
tion which  was  to  be  absorbed. 

This  method  of  procedure  was  attended  with  a  great  deal  of 
difficulty  and  delay  and  in  some  instances  the  purpose  sought  to 
be  accomplished  was  prevented  by  the  refusal  of  shareholders  to 
waive  their  rights.  Under  such  circumstances  it  became  necessary 
to  deprive  certain  shareholders  in  the  liquidating  association  of 


ROMANCE  AND  TRAGEDY  OF  BANKING  357 

stock  in  the  absorbing  bank,  or  to  induce  the  holders  of  stock  in 
the  latter  to  surrender  a  portion  of  their  original  holdings  to  be 
sold  to  shareholders  in  the  liquidating  bank. 

The  amendment  proposed  was  in  line  with  the  law  of  the  State 
of  New  York,  which  conserves  the  rights  of  all  shareholders, 
either  to  become  stockholders  in  the  absorbing  bank,  or  to  be 
paid  the  liquidating  value  of  their  stock,  which  arrangement 
permits  the  surrendered  stock  to  be  sold  to  other  interests. 

In  objecting  to  this  proposed  amendment  to  the  law  Mr.  Mur- 
ray simply  did  not  understand  the  necessity  for  it  and  made  no 
effort  to  inform  himself  on  the  subject  previous  to  appearing 
before  the  Commission.  Consolidations  or  mergers  of  banks  were 
by  no  means  as  frequent  during  the  brief  period  of  his  former 
connection  with  the  Comptroller's  office  as  they  were  subsequent 
to  that  time.  Mergers  overnight  were  not  thought  of  in  those 
days.  Statutes  that  worked  very  well  in  years  gone  by  had 
become  wholly  inadequate  to  meet  the  changed  conditions  in  bank- 
ing methods  in  later  years.  This  was  true  of  many  of  the  pro- 
visions of  the  national  banking  laws  which  had  not  been  amended 
between  the  date  Mr.  Murray  left  the  Comptroller's  office  in  1899 
and  the  date  of  his  appointment  as  Comptroller  in  1908.  But 
these  provisions  of  law,  while  generally  admitted  to  be  defective 
and  inadequate  during  his  former  connection  with  the  office,  were 
allowed  to  stand  as  they  were  because  of  the  apparent  impossi- 
bility of  impressing  upon  the  legislative  branch  of  the  Govern- 
ment the  necessity  for  their  amendment. 

The  faultiness  of  Mr.  Murray's  objections  to  the  amendments 
proposed,  however,  was  his  lack  of  familiarity  with  the  banking 
laws  and  their  practical  operation.  This  ignorance  was  further 
displayed  by  his  dissent  to  the  proposition  to  amend  Section  5220 
of  the  Revised  Statutes  in  regard  to  the  voluntary  liquidation  of 
banks. 

A  bank  under  existing  law  may  be  placed  in  voluntary  liqui- 
dation by  the  stockholders  owning  two-thirds  of  the  stock,  with- 
out the  consent  or  approval  of  the  Comptroller.  When  such  a 
bank  has  deposited  lawful  money  with  the  Treasurer  of  the  United 
States  to  provide  for  the  redemption  of  its  outstanding  circula- 
tion, as  it  is  required  by  law  to  do  within  six  months  after  being 


358  ROMANCE  AND  TRAGEDY  OF  BANKING 

voted  into  liquidation,  it  passes  from  under  the  supervision  of  the 
Comptroller  of  the  Currency  into  the  hands  of  its  shareholders 
and  the  Comptroller  does  not  again  exercise  supervision  over  it, 
except  in  event  of  default  in  the  payment  of  a  creditor.  When  a 
creditor  obtains  judgment  against  a  liquidating  bank  in  any  court 
of  record  and  makes  application  to  the  Comptroller,  accompanied 
by  a  certificate  from  the  clerk  of  the  court  that  such  judgment 
has  been  rendered  and  has  remained  unsatisfied  for  a  period  of 
thirty  days,  the  Comptroller  may  appoint  a  receiver  for  the 
bank  and  proceed  to  enforce  the  individual  liability  of  its  share- 
holders for  any  unpaid  debts  to  creditors. 

It  was  a  very  common  thing  for  the  Comptroller's  office  to 
receive  complaints  from  creditors  of  banks  in  process  of  liquida- 
tion that  the  affairs  of  the  bank  were  not  being  properly  man- 
aged. The  suggested  amendment  to  the  law  proposed  that  the 
Comptroller  should  be  given  authority  to  require  reports  from 
banks  in  voluntary  liquidation,  and  to  make  such  examinations 
of  their  affairs  as  might  be  deemed  necessary  in  the  interest  of 
creditors  and  stockholders,  to  the  end  that  settlements  might  be 
effected  as  expeditiously  as  possible  and  that  all  the  creditors 
and  shareholders  might  receive  the  full  amount  to  which  they  were 
entitled. 

Because  of  the  opposition  of  Mr.  Murray,  or  failure  to  sup- 
port almost  every  essential  suggestion  that  was  made  on  that 
occasion  for  amendments  to  the  laws,  and  the  apparent  unfavor- 
able attitude  of  the  bankers  who  were  present  at  the  hearing 
toward  any  legislation  in  the  nature  of  increasing  the  super- 
visory powers  of  the  Comptroller,  or  imposing  any  additional 
restrictions  upon  the  banks,  the  recommendations  then  submitted 
and  the  prolonged  discussion  that  followed,  amounted  to  naught. 

While  Mr.  Murray  objected  to  almost  every  recommendation 
made  to  the  Commission,  he  suggested  nothing  in  substitution, 
except  to  allow  the  law  to  remain  as  it  was.  He  said: 

I  think  the  law  is  all  right  as  it  is.  If  the  Comptroller 
has  the  power  to  make  the  officers  stay  within  it  it  is  all 
right  as  it  is  today  (December  2,  1908)  with  the  exception 
of  a  little  smoothing  out  here  and  there. 


ROMANCE  AND  TRAGEDY  OF  BANKING  359 

In  consequence  of  the  attitude  of  Mr.  Murray,  the  amend- 
ments then  proposed  were  discarded  entirely  by  the  Commission, 
and  the  Secretary  of  the  Treasury  was  requested  to  have  pre- 
pared and  to  submit  at  a  later  date  such  recommendations  as  he 
and  the  Comptroller  should  agree  upon.  Subsequently  other  rec- 
ommendations were  submitted  to  the  Commission,  but  they  had 
no  bearing  upon  the  important  provisions  of  the  law  which  needed 
amending  in  the  interests  of  the  better  security  of  the  depositors 
in  the  banks  and  the  correction  of  the  incongruities  and  ambigui- 
ties in  the  statutes  at  that  time. 

This  fact  Mr.  Murray  learned  in  the  course  of  time  and  was 
forced  to  realize  the  necessity  for  and  the  potency  of  the  amend- 
ments suggested  in  the  practical  supervision  of  the  banks.  Five 
years  later,  on  January  8,  1913,  he  declared  before  the  "Money 
Trust"  Committee  of  the  House  of  Representatives  that  the  whole 
system  of  bank  examination  was  illogical  and  unscientific,  and 
suggested  a  number  of  amendments  to  the  law,  some  of  which 
were  unnecessary  and  others  impracticable  and  inadvisable. 

Mr.  Murray's  Famous  Twenty-nine  Questions 

One  of  the  most  effective  regulations  that  Mr.  Ridgely  made 
when  Comptroller  of  the  Currency,  and  one  that  accomplished 
the  most  beneficial  results,  was  the  requirement  that  the  board  of 
directors  of  a  bank  should  make  reply  over  their  individual  signa- 
tures to  letters  of  criticism  based  upon  the  reports  of  national 
bank  examiners,  in  which  the  attention  of  the  board  was  called 
to  all  violations  of  the  law  and  unsatisfactory  conditions  dis- 
closed by  the  examination. 

In  almost  every  board  of  directors  of  a  bank  there  will  be 
found  some  men  not  identified  with  the  active  management  of  the 
institution  who  will  not  countenance  any  violations  of  law  or 
loose  or  dangerous  practices,  and  whenever  the  attention  of  such 
men  is  called  to  any  matter  subject  to  criticism  it  is  usually 
corrected.  If  the  subject  of  criticism  was  a  matter  of  serious 
importance,  it  was  Mr.  Ridgely's  practice  to  send  a  circular 
letter  to  each  member  of  the  board  calling  his  attention  to  the 
fact  that  an  important  letter  had  been  written  to  the  bank  and 


360          ROMANCE  AND  TRAGEDY  OF  BANKING 

requesting  him  to  see  it  and  to  unite  with  the  other  directors  in 
making  reply  thereto.  This  practice  had  the  effect  of  bringing 
to  the  attention  of  every  member  of  the  board  any  unsatisfactory 
condition  in  the  bank  and  reaching  the  men  on  the  board  who 
could  be  depended  upon  to  correct  the  matters  complained  of. 

When  Mr.  Murray  assumed  charge  of  the  office,  he  discon- 
tinued this  practice  which  had  proven  so  effective,  and  substi- 
tuted therefor  a  list  of  questions  which  he  sent  to  each  bank 
examiner  with  instructions  to  convene  the  board  of  directors  at 
the  time  of  his  examination  of  a  bank  and  submit  them  to  each 
director  for  answer.  This  list  contained  twenty-nine  questions, 
and  was  the  most  amateurish  document  that  ever  emanated  from 
the  Comptroller's  office.  They  always  will  be  known  as  the  twenty- 
nine  varieties.  The  directors  were  required  to  state  how  many 
of  them  knew  of  the  condition  of  the  bank  in  all  its  details.  How 
many  had  but  a  general  knowledge  of  its  condition.  How  many 
knew  nothing  at  all  of  its  condition.  Whether  they  had  a  full 
knowledge  of  the  habits  and  moral  standing  of  the  bank's  em- 
ployees. Whether  they  could  certify  to  the  genuineness  of  the 
signatures  to  the  notes  discounted  by  the  bank.  How  often  they 
examined  and  listed  all  the  stocks,  securities  and  real  estate 
mortgages  owned  by  the  bank.  Whether  they  called  in  and  bal- 
anced the  pass-books  and  satisfied  themselves  as  to  their  correct- 
ness. Whether  they  verified  outstanding  certificates  and  checks, 
examined  into  the  condition  of  the  lawful  money  reserve,  and 
counted  the  cash  periodically,  checked  up  the  stock  ledgers  and 
examined  the  profit  and  loss  and  expense  accounts  of  the  bank, 
read  the  National  Bank  Act,  etc.,  etc. 

Imagine  a  director  of  one  of  our  large  city  banks,  a  busy 
man  of  affairs  and  extensive  interests,  being  requested  to  state 
whether  he  ever  counted  the  cash  in  his  bank  or  balanced  the 
depositors'  pass-books.  Whether  he  could  certify  to  the  genu- 
ineness of  the  signatures  to  the  notes  held  by  the  bank,  and  simi- 
lar questions ;  or  the  director  of  a  country  bank,  engaged  in 
farming  or  some  business  of  a  non-professional  character,  being 
asked  whether  he  ever  studied  the  National  Bank  Act.  The 


ROMANCE  AND  TRAGEDY  OF  BANKING  361 

assertion  may  be  ventured  that  a  large  majority  of  the  directors 
of  some  of  the  very  best  managed  banks  in  the  country  never 
have  read  the  national  banking  laws  and  have  only  a  general 
knowledge  of  their  provisions.  Nor  is  it  necessary  to  the  success- 
ful conduct  of  a  bank  that  a  director  should  have  more  than  a 
general  knowledge  of  the  main  features  of  the  Bank  Act,  and  these 
he  may  and  usually  does  learn  in  the  practical  operation  of  his 
bank,  and  not  by  reading  the  Bank  Act. 

When  Mr.  Murray  was  before  the  National  Monetary  Com- 
mission, Senator  Knox  asked  him  the  following  question  in  con- 
nection with  this  list  of  interrogatories  which  he  instructed  the 
examiners  to  submit  to  directors: 

"Do  you  believe  that  you  could  get  anyone  who  was  respons- 
ible to  act  as  a  director  of  a  national  bank  if  the  law  required 
every  director  to  know  that  every  name  signed  to  every  obligation 
that  the  bank  held  was  the  genuine  signature  of  the  person  it 
purported  to  be?" 

To  which  question  Mr.  Murray  replied : 

"I  do  not  think  you  could  find  that  kind  of  a  man  in  the 
United  States,  or  in  the  world,  Senator,  and  it  was  to  establish 
that  fact  officially  that  I  asked  the  question  in  my  list  of  ques- 
tions." 

Has  anyone  ever  heard  of  a  more  absurd  proposition  emanat- 
ing from  a  Government  official?  To  issue  a  series  of  questions, 
ridiculous  in  their  nature,  for  the  avowed  purpose  of  confirming 
officially  the  fact  that  the  directors  of  banks  did  not  know  what 
he  admitted  he  knew  they  did  not  know,  and  what  the  law  or  the 
proper  conduct  of  a  bank  did  not  require  them  to  know,  simply 
for  the  purpose  of  establishing  that  fact  officially. 

Is  it  to  be  wondered,  therefore,  that  a  director  of  one  of  our 
larger  banks,  to  whom  the  questions  were  propounded,  should 
have  exclaimed  when  he  read  the  questions,  "Angels  and  ministers 
of  grace  defend  us  from  such  administration."  And  that  another 
should  have  lapsed  into  poetry  on  the  subject  and  under  the 
inspiration  of  the  muse  delivered  himself  in  rhyme,  through  the 
columns  of  a  Boston  journal,  as  follows: 


362  ROMANCE  AND  TRAGEDY  OF  BANKING 

TO    A    BANK    DIRECTOR 

Have  you  counted  the  quarters  and  pennies  and  dimes ; 
E'er  let  counterfeits  by  you — and  how  many  times? 
Just  how  many  pens,  pencils  and  stamps  in  a  year, 
How  much  mucilage,  paper  and  ink  use  you  here? 
Got  the  birthplace  and  lineage  pat  of  each  clerk, 
And  the  moment  they  start  and  get  through  with  their  work? 
On  their  outside  diversion  made  Sherlock  Holmes  search  — 
Which   they  take  to  the   most,   saloon,  theatre   or   church? 
Note  the  gowns  and  the  hats  that  your  tellers'  wives  wear, 
Lest  your  bank  in  the  payment  for  same  have  a  share? 
Do  you  walk  round  at  midnight  to  test  lock  and  bar, 
Lest  some  window  be  loose  or  some  safe  door  ajar? 
And  do  you  as  an  expert  in  handwriting  rank, 
Daily  scan  every  word  that  is  writ  in  the  bank? 
How's  the  janitor  doing?     Are  corners  swept  clean? 
Does  the  watchman  take  catnaps,  his   box   rings   between? 
On  the  dames  who  do  scrubbing  your  eye  keep,  let's  hope, 
Lest  extravagant  they  in  consumption  of  soap? 
If  in  any  of  these  little  stunts  you  don't  shine, 
You've  just  one  thing  to  do,  sir,  this  moment  resign. 

No  general  rule  of  conduct  applicable  to  all  alike  can  be  pro- 
scribed for  bank  management.  The  element  of  personal  equation 
enters  as  largely  into  this  line  of  business  as  it  does  into  all 
occupations  of  a  fiduciary  character.  What  may  be  considered 
good  management  in  one  bank  might  be  regarded  as  very  defective 
management  in  another  bank.  So  far  as  the  degree  of  personal 
supervision  exercised  by  boards  of  directors  over  their  respective 
institutions  is  concerned,  the  banks  of  the  entire  country  may 
be  divided  into  three  classes.  The  banks  in  the  larger  cities,  as 
a  rule,  have  better  systems  of  management  and  more  complete 
organization  than  those  in  the  smaller  cities  and  towns.  And 
this  must  necessarily  be  so,  because  of  the  larger  volume  of  busi- 
ness handled  and  the  nature  and  extent  of  their  transactions. 
The  business  of  such  banks  is  separated  into  departments,  and 
each  department  has  its  special  line.  Discount,  finance,  auditing 
and  other  committees  are  provided,  and  each  committee  has  cer- 
tain specific  duties  to  perform.  Loans  and  discounts  are  passed 


ROMANCE  AND  TRAGEDY  OF  BANKING  363 

upon  and  approved  by  a  discount  committee  before  they  are 
made,  and  in  some  banks  the  directors  alternate  in  serving  on 
such  committees.  The  full  board  has  regular  days  for  meeting, 
and  tri-weekly  or  semi-weekly  meetings  are  held  and  the  directors 
keep  in  close  touch  with  the  important  business  of  the  institution. 
But  even  in  such  well-managed  and  regulated  banks  the  directors 
do  not  look  after  the  details  of  the  work,  such  as  was  covered 
by  Mr.  Murray's  list  of  questions.  Such  matters  of  detail  are 
left  to  the  supervision  of  the  executive  officers  of  the  bank,  where 
they  properly  belong. 

In  another  class  of  banks,  such  as  are  found  in  the  smaller 
cities  or  towns,  it  will  be  found  that  the  directors  as  a  board  give 
very  little  attention  to  the  details  of  management.  They  place 
competent  men  in  charge  of  the  bank  and  leave  the  management 
almost  wholly  to  them.  They  hold  board  meetings  at  stated 
intervals,  at  which  the  loans  and  discounts  made  are  usually 
examined  and  approved  and  the  acts  of  the  officers  concurred  in. 
In  such  banks  all  the  details  of  management  are  left  to  the 
officers,  and  probably  could  not  be  improved  upon  if  daily  meet- 
ings of  the  board  were  held  and  each  transaction  given  their 
personal  attention.  In  most  of  the  banks  of  this  class  the  man- 
agement is  competent,  conservative,  and  all  that  could  be  desired. 

The  third  class  of  banks,  and  fortunately  they  are  largely 
in  the  minority,  are  those  whose  boards  of  directors  give  the 
business  of  the  bank  very  little,  if  any,  attention,  but  leave  the 
management  entirely  to  one  or  more  of  the  officers.  The  directors 
seldom  meet  as  a  board  and  know  very  little  of  the  bank's  affairs. 
Such  banks  are,  as  a  rule,  dominated  by  one  man,  or  one  or  two 
of  the  directors,  who,  usually,  are  free  borrowers.  In  this  class 
of  banks  loose  and  dangerous  practices  will  be  found,  injudicious 
loaning,  speculative  tendencies,  and  very  often  absolute  incom- 
petency. 

It  was  this  class  of  banks  that  Mr.  Murray  had  in  mind  when 
he  issued  his  famous  twenty-nine  questions.  He  made  the  same 
mistake  in  this  respect  in  regard  to  directors  that  he  did  in  meas- 
uring the  standard  of  efficiency  of  the  examiners  as  a  whole  by 
the  shortcomings  of  a  few.  Such  of  his  questions  as  were  rational 
were  very  appropriate  in  their  application  to  the  directors  of 


364          ROMANCE  AND  TRAGEDY  OF  BANKING 

banks  of  this  class.  Had  the  questions  been  well  considered  and 
directed  toward  the  essential  features  of  what  constitutes  good 
and  proper  management,  they  would  have  accomplished  their  pur- 
pose in  stirring  up  the  directors  of  such  institutions  to  a  sense 
of  their  responsibilities  and  duties  to  their  respective  associations 
and  their  depositors  and  stockholders,  instead  of  inspiring  ridi- 
cule, as  they  did,  by  being  submitted  to  the  boards  of  directors 
of  banks  whose  management  was  all  that  any  reasonable-minded 
man  familiar  with  proper  and  efficient  bank  management  could 
expect. 

While  Mr.  Murray  was  no  doubt  actuated  by  proper  motives 
in  endeavoring  to  raise  the  standard  of  bank  management,  as  he 
was  in  endeavoring  to  raise  the  standard  of  bank  examinations, 
his  failure  to  discriminate  in  each  instance  between  good  and  bad 
management  and  examinations,  and  the  publicity  he  gave  to  the 
percentage  of  directors  who  did  not  know  the  things  they  were 
not  required  to  know  and  which  it  was  not  necessary  they  should 
know,  and  the  things  they  did  not  do  and  which  it  was  unnecessary 
for  them  to  do,  had  the  effect  of  weakening  confidence  in  the 
banks  by  creating  in  the  public  mind  the  false  impression  that 
the  directors  of  all  banks  were  neglectful  alike  of  their  duties  and 
permitted  their  institutions  to  be  run  in  a  loose  and  dangerous 
manner. 

A  public  official  who  is  actuated  by  sincere  and  sensible  mo- 
tives in  quietly  inaugurating  administrative  reforms  which  he 
honestly  believes  to  be  for  the  best  good  of  the  service  of  which 
he  is  in  charge  is  a  valuable  public  servant  and  is  deserving  of 
the  commendation  and  hearty  support  and  encouragement  of 
every  right-minded  citizen.  But  the  official  who  attempts  to  make 
radical  changes  in  long-established  usages,  which  affect  vast 
interests,  without  regard  to  the  merit  of  such  changes  or  their 
effect  upon  such  interests,  but  simply  for  the  purpose  of  exploit- 
ing himself  in  the  public  eye  as  a  reformer,  and  to  secure  the 
approbation  of  the  public  through  misrepresentation  of  actual 
conditions  and  facts,  is  a  dangerous  character  in  any  position  of 
trust  and  responsibility,  and  the  sooner  his  real  essence  is  dis- 
closed and  his  methods  and  motives  exposed,  the  better  for  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  365 

public    service   and    the   interests    affected    by    his    ill-considered 
acts. 


Murray's  Internal  Management  of  the  Currency  Bureau 

Mr.  Murray's  policies  and  his  methods  of  putting  them  into 
force  were  as  pronounced  and  peculiar  in  the  internal  manage- 
ment of  the  Currency  Bureau  as  they  were  in  his  outward  deal- 
ings with  the  banks  and  the  bank  examiners.  When  he  assumed 
charge  of  the  Bureau  he  manifested  a  disposition  to  pursue  a 
very  radical  course.  This  was  during  the  last  year  of  President 
Roosevelt's  administration.  After  the  change  of  administration 
from  President  Roosevelt  to  President  Taft,  and  the  severe  criti- 
cisms to  which  Mr.  Murray  was  subjected  by  some  of  the  news- 
papers and  bankers  of  the  country  for  some  of  his  administrative 
acts,  what  promised  to  be  at  the  outset  a  very  radical  policy, 
unlike  that  of  any  of  his  predecessors,  was  suddenly  changed  to 
the  opposite  extreme  in  his  attitude  toward  the  banks.  He  not 
only  abandoned  his  dictatorial  style  of  correspondence,  but  dis- 
continued writing  any  letters  to  the  banks  based  upon  the  condi- 
tions shown  by  examiners'  reports,  except  in  a  very  few  instances. 

Prior  to  the  passage  of  the  Act  of  June  22,  1906,  which 
increased  the  limit  of  loans  that  the  banks  could  lawfully  make, 
fifty  per  cent,  of  the  banks  violated  the  law  by  making  loans  in 
excess  of  the  legal  limit — not  always  the  same  banks,  but  always 
about  the  same  proportion.  When  the  law  was  amended,  Mr. 
Ridgely,  who  was  then  Comptroller,  determined  to  put  an  end 
to  such  violations  of  the  statute,  even  to  the  extent  of  instituting 
suit  to  forfeit  the  charter  of  any  bank  which  persisted  after  due 
warning  in  disregarding  the  limitations,  and  he  so  advised  all  the 
banks  in  a  circular  letter  calling  their  attention  to  the  amended 
law  and  explaining  its  provisions.  This  action  on  the  part  of 
Mr.  Ridgely  had  the  effect  of  greatly  reducing  violations  of  law 
of  this  nature. 

An  examination  of  the  reports  of  condition  of  the  banks  made 
under  the  last  call  immediately  preceding  the  change  in  the  law 
showed  that  nearly  sixty  per  cent,  of  the  banks  reporting  under 
that  call  had  excessive  loans.  The  reports  under  the  first  call 


366          ROMANCE  AND  TRAGEDY  OF  BANKING 

made  several  weeks  after  the  law  had  been  amended,  and  after 
the  banks  had  been  notified  that  it  was  the  purpose  to  strictly 
enforce  an  observance  of  the  limitation,  violations  of  law  of  this 
nature  had  been  reduced  to  about  twenty-five  per  cent,  of  the 
banks  reporting,  and  many  of  these  loans  were  made  before  the 
law  was  amended  and  could  not  be  reduced  until  maturity.  Each 
succeeding  call  showed  a  further  reduction,  and  the  reports  made 
under  the  last  call  immediately  preceding  the  date  that  Mr. 
Murray  assumed  active  charge  of  the  Bureau  showed  the  exces- 
sive loans  had  been  reduced  to  about  thirteen  per  cent,  of  the 
banks  reporting,  and  in  this  number  were  included  as  excessive 
loans  balances  with  banks  other  than  national  which  were  then 
treated  as  loans  subject  to  the  limit,  but  subsequently  were  not 
so  considered.  Eliminating  this  class  of  loans  from  the  calcula- 
tion would  reduce  the  number  to  about  ten  per  cent. 

Before  Mr.  Murray  took  charge  of  the  Currency  Bureau,  it 
had  been  the  uniform  practice  of  the  office  from  the  beginning  of 
the  national  system  to  write  letters  to  the  banks  based  upon 
examiners'  reports,  and  upon  reports  of  condition  made  by  the 
banks,  calling  their  attention  to  every  violation  of  law  shown 
and  requiring  them  to  be  corrected.  The  banks  were  also  required 
to  make  reply  to  such  letters,  stating  what  had  been  or  would 
be  done  toward  complying  with  the  office  instructions.  These 
letters  were  very  effective  in  securing  results,  and  in  the  event  of 
the  subsequent  failure  of  a  bank,  were  relied  upon  largely  by 
United  States  Attorneys  to  aid  them  in  securing  convictions  for 
criminal  violations  of  law.  They  were  also  effective  in  establish- 
ing the  individual  liability  of  officers  or  directors  for  losses  sus- 
tained by  a  bank  on  loans  and  transactions  involving  violations 
of  law. 

At  that  time  probably  seventy-five  per  cent,  of  the  examiners' 
reports,  and  about  the  same  percentage  of  reports  of  condition 
made  by  the  banks,  disclosed  violations  of  law  of  one  kind  or 
another,  making  it  necessary  to  write  letters  to  that  number  of 
banks. 

This  practice  was  all  changed  by  Mr.  Murray.  Instead  of 
the  Comptroller's  office  writing  to  the  directors  of  banks,  calling 
their  attention  to  violations  of  law  and  other  unsatisfactory 


ROMANCE  AND  TRAGEDY  OF  BANKING  367 

conditions,  and  requiring  their  correction,  the  examiners  were 
instructed  to  convene  the  board  at  the  time  of  examinations,  take 
such  matters  up  with  them  in  person  and  secure  their  correction 
before  leaving  the  bank.  Or,  if  this  could  not  be  accomplished, 
to  forward  with  their  reports  a  statement  signed  by  the  directors 
as  to  what  would  be  done  toward  complying  with  the  examiner's 
directions. 

This  policy  was  all  right  where  definite  and  satisfactory 
results  could  be  obtained,  and  as  far  as  these  instructions  related 
to  directing  examiners  to  have  matters  adjusted  as  fully  as  pos- 
sible before  leaving  the  bank,  this  practice  had  been  in  force  for 
years  before  Mr.  Murray  assumed  charge  of  the  Currency 
Bureau,  and  did  not  originate  with  him,  as  the  public  was  given 
to  understand. 

In  many  instances  under  Mr.  Murray's  administration,  as 
well  as  under  the  administrations  of  his  predecessors,  examiners 
succeeded  in  straightening  out  unsatisfactory  conditions  before 
leaving  the  bank  and  reported  to  the  Comptroller  the  conditions 
found  at  the  beginning  of  an  examination  and  what  had  been 
done  toward  their  correction. 

Where  a  situation  could  be  handled  in  this  manner,  much 
speedier  results  were  obtained  than  by  the  slow  process  of  cor- 
respondence. But  in  a  large  percentage  of  cases  it  was  beyond 
the  power  of  directors  to  make  an  immediate  adjustment  of  un- 
satisfactory conditions,  and  therefore  the  examiner's  efforts  to 
secure  correction  during  his  stay  in  the  bank  were  futile.  In 
such  cases,  in  order  to  avoid  the  writing  of  letters  to  such  banks, 
examiners  under  Mr.  Murray's  administration  were  instructed 
to  procure  and  forward  with  their  reports  a  statement  signed 
by  the  directors,  admitting  their  knowledge  of  the  objectionable 
features  and  promising  to  correct  them  as  early  as  possible,  and 
when  such  signed  statements  accompanied  reports  they  were 
usually  accepted  as  satisfactory  and  the  reports  and  letters  were 
filed  away  without  action  on  the  part  of  the  Comptroller. 

This  policy  of  administration  originated  with  Mr.  Murray. 
He  is  entitled  to  all  the  credit  that  may  be  due  for  any  good 
results  and  all  the  blame  that  attaches  to  the  failure  of  such  a 
policy. 


368          ROMANCE  AND  TRAGEDY  OF  BANKING 

At  a  dinner  given  in  New  York  City  in  1909,  in  Mr.  Murray's 
honor,  by  a  prominent  banker,  at  which  a  number  of  bankers 
were  present,  he  made  a  brief  address  in  which  he  reviewed  the 
reforms  that  he  had  inaugurated  in  the  administration  of  the 
Comptroller's  office,  and  others  that  he  contemplated  making. 
Upon  his  return  to  Washington,  in  referring  to  this  dinner,  he 
made  the  statement  that  what  most  pleased  the  bankers  who  were 
present  on  that  occasion  was  his  statement  that  he  did  not  intend 
to  write  them  any  annoying  letters  criticising  non-essentials  in 
the  management  of  their  banks ;  and  he  gave  directions  to  the 
office  force  that  no  letters  should  be  written  to  the  banks  which 
were  calculated  to  annoy  them. 

This  original  and  novel  method  of  Mr.  Murray's  in  handling 
the  reports  of  national  bank  examiners  had  the  effect  of  reducing 
the  number  of  reports  upon  which  it  had  been  the  practice  to 
write  letters  of  criticism  from  about  sixty  per  cent,  to  an  average 
of  about  five  per  cent,  of  the  total  number  received  each  week. 
In  other  words,  where  it  formerly  was  found  necessary  to  write 
the  banks  on  sixty  out  of  every  hundred  reports  of  examination 
received,  under  the  reform  policy  of  not  annoying  the  banks  with 
letters  only  five  letters  were  written  on  every  hundred  reports 
received.  But  the  banks  were  in  the  same  average  condition  during 
this  period  of  non-annoyance  as  they  were  when  the  former  prac- 
tice prevailed  of  writing  on  every  violation  of  law  that  was  shown 
by  an  examiner's  report,  and  the  percentage  of  reports  showing 
violations  of  law  of  various  kinds  was  about  the  same. 

When  the  reports  of  bank  examiners  disclosed  violations  of 
law  or  other  loose  and  dangerous  practices,  it  was  the  duty  of 
the  Comptroller  to  require  the  bank  to  correct  them,  regardless 
of  how  annoying  such  communications  might  be  to  the  banks 
receiving  them,  and  when  he  failed  to  do  this  through  fear  of 
giving  annoyance,  or  because  of  the  unpopularity  of  such  a  pol- 
icy, he  was  derelict  in  the  performance  of  his  duty  and  unsuited  to 
hold  the  office  of  Comptroller. 

In  the  exploitation  of  this  so-called  reform  the  erroneous 
impression  was  created  in  the  public  mind  that  the  condition  of 
the  banks  as  a  whole  had  been  greatly  improved  in  consequence 
of  the  improved  method  of  examinations,  making  it  necessary  for 


ROMANCE  AND  TRAGEDY  OF  BANKING  369 

the  Comptroller's  office  to  write  letters  of  admonition  to  only  five 
out  of  every  hundred  banks  examined  where  formerly  it  was 
necessary  to  write  such  letters  to  sixty  out  of  every  hundred 
banks  examined.  Official  bulletins  were  issued  to  the  examiners 
and  given  general  publicity,  declaring  that  there  was  not  a  bank 
on  the  entire  list  that  was  in  an  unsatisfactory  condition  and 
that  bank  failures  were  occurrences  of  the  past.  But  at  the  very 
time  those  bulletins  were  issued  and  this  declaration  made,  the 
Comptroller  was  daily  writing  banks  that  because  of  their  unsat- 
isfactory condition  they  would  be  thereafter  examined  every  three 
months,  and  other  banks  were  being  forced  into  voluntary  liqui- 
dation to  avoid  receiverships. 

Of  the  more  than  two  hundred  examiners'  reports  received 
weekly,  probably  fifty  per  cent,  of  that  number  contained  viola- 
tions of  law  in  the  nature  of  excessive  loans,  deficiency  in  lawful 
money  reserve,  money  borrowed  in  excess  of  the  capital  stock, 
real  estate  loans,  stock  investments  and  other  transactions  of  an 
unlawful  nature,  to  say  nothing  of  numerous  other  irregularities 
of  a  more  or  less  objectionable  nature. 

The  excellent  results  attained  by  Mr.  Murray's  immediate 
predecessor  in  vigorously  endeavoring  to  compel  the  banks  to 
observe  the  law  in  regard  to  the  limit  of  loans  were  almost  wholly 
destroyed  by  Mr.  Murray's  laxity  in  the  enforcement  of  this  pro- 
vision of  the  statute.  A  large  percentage  of  the  reports  of  exam- 
iners that  were  passed  without  action  for  the  purpose  of  avoiding 
the  writing  of  letters  to  the  banks  that  would  annoy  them,  dis- 
closed violations  of  this  limitation  varying  in  amount  from  $500 
to  $75,000  or  $80,000  in  excess  of  the  legal  limit.  And  the  rule 
of  action  laid  down  by  Mr.  Murray  for  the  guidance  of  the  clerks 
whose  duty  it  was  to  examine  these  reports  and  prepare  the  letters 
of  criticism,  was  that  no  excessive  loan  should  be  criticised  unless 
it  was  regarded  by  the  examiner  as  unsafe  or  insufficiently 
secured.  Yet  the  law  made  no  distinction  between  a  secured  and 
an  unsecured  loan  in  fixing  the  limit,  but  required  that  no  loan, 
no  matter  how  secure,  should  exceed  the  limit  prescribed  by  the 
statute. 

As  a  reason  for  not  criticising  deficiencies  in  reserve,  Mr. 
Murray  stated  that  the  United  States  was  the  only  country  in 


370          ROMANCE  AND  TRAGEDY  OF  BANKING 

the  world  that  had  such  a  foolish  law,  that  the  banks  complained 
of  its  hardship,  and  that  he  did  not  propose  to  require  them  to 
observe  it.  He  stated  further  in  regard  to  this  provision  of  law 
that  it  was  not  necessary  to  call  the  attention  of  banks  to  a  short- 
age in  reserve,  or  to  require  them  to  make  the  deficiency  good,  as 
they  knew  the  law  as  well  as  the  Comptroller,  and  knew  when 
they  were  violating  it.  In  many  cases  the  deficiencies  in  reserve 
were  very  large  and  the  banks  that  were  short  were  chronically 
deficient. 

Later  in  his  administration  he  was  compelled  to  change  his 
views  in  regard  to  the  necessity  for  maintenance  of  the  legal 
reserve,  and  to  issue  a  special  letter  to  the  banks  that  were  de- 
ficient, warning  them  that  they  were  subject  to  a  receivership  for 
violating  the  law  in  this  respect  and  would  thereafter  be  exam- 
ined every  thirty  or  sixty  days  until  the  legal  reserve  was  main- 
tained. Money  borrowed  by  one  bank  from  another,  largely  in 
excess  of  the  legal  limit  and  concealed  by  subterfuges  in  one  form 
or  another,  was  not  allowed  to  be  written  on,  for  the  reason,  Mr. 
Murray  stated,  that  "the  business  of  this  country  cannot  be 
carried  on  by  any  hard  and  fast  laws.  The  banks  must  be  given 
some  latitude." 

Real  estate  loans  were  passed  without  notice,  and  in  many 
cases  the  aggregate  investments  of  a  bank  in  this  class  of  securi- 
ties exceeded  its  capital  stock. 

The  law  permitted  a  national  bank  to  own  only  such  real 
estate  as  was  necessary  for  its  immediate  accommodation  in  the 
transaction  of  its  banking  business,  and  such  as  it  should  acquire 
in  good  faith  in  satisfaction  of  debts.  Realty  taken  for  debt, 
however,  was  required  to  be  disposed  of  within  five  years  from 
the  date  it  was  acquired. 

As  illustrative  of  the  unwarranted  construction  placed  upon 
this  statute  by  Mr.  Murray,  the  following  case  in  point  is  cited : 

The  representative  of  a  small  country  bank  near  by  called  in 
person  at  the  Comptroller's  office  one  day  and  inquired  of  the 
Deputy  Comptroller  whether  there  was  any  legal  objection  to  his 
bank  purchasing  a  vacant  piece  of  ground  around  the  corner  near 
where  the  bank  was  located  for  the  purpose  of  providing  hitch- 
ing posts  for  the  horses  of  country  customers  when  they  came  to 


ROMANCE  AND  TRAGEDY  OF  BANKING  371 

town,  the  street  on  which  the  bank  was  located  being  so  narrow 
that  the  authorities  would  not  permit  the  parking  of  horses 
thereon. 

The  Deputy  Comptroller  advised  him  that  the  bank  could  not 
lawfully  acquire  real  estate  for  that  purpose,  that  if  the  bank  had 
a  right  to  purchase  this  lot  and  erect  a  shed  and  hitching  posts 
thereon  for  the  purpose  of  furnishing  stable  accommodations  for 
customers'  horses  it  would  also  have  the  right  to  build  a  black- 
smith shop  on  the  lot  and  shoe  the  horses,  but  as  it  was  no  part  of 
the  legitimate  or  incidental  business  of  a  bank  to  furnish  livery 
or  horse-shoeing  accommodations  for  its  customers  the  purchase 
of  real  estate  for  that  purpose  could  not  lawfully  be  made. 

Not  satisfied  with  the  opinion  of  the  Deputy  Comptroller  on 
the  subject  the  representative  of  the  bank  appealed  to  the  Comp- 
troller, who  informed  him  that  the  office  would  interpose  no  ob- 
jection to  the  bank  making  the  purchase. 

Some  time  thereafter  a  story  appeared  in  the  press,  attrib- 
uted to  Mr.  Murray,  and  went  the  usual  rounds,  to  the  effect  that 
when  the  John  R.  Walsh  bank  of  Chicago  Avas  in  an  insolvent  con- 
dition and  needed  the  attention  of  the  Comptroller,  the  Comp- 
troller's office  was  frittering  away  time  in  carrying  on  a  contro- 
versy with  a  little  bank  in  a  nearby  town  over  the  question  of  its 
right  to  purchase  an  insignificant  piece  of  real  estate.  The  pur- 
pose of  this  innuendo  was  to  unjustly  reflect  upon  the  previous 
administration  of  the  bureau,  while  the  facts  were  that  there  was 
no  correspondence  with  the  bank  on  the  subject  at  all  and  that  the 
Walsh  bank  failed  five  years  before  the  incident  related  occurred. 

In  his  supervision  of  the  banks  Mr.  Murray  seemed  to  be  gov- 
erned by  the  rule  of  action  which  he  was  heard  frequently  to 
express,  that,  "It  is  always  best  to  pursue  the  course  of  least  re- 
sistance". This  course  of  action  appeared  to  control  his  dealings 
with  the  banks  after  the  first  jolt  he  received,  occasioned  by  the 
unfavorable  criticism  of  his  famous  twenty-nine  questions,  as  the 
one  likely  to  meet  with  the  least  opposition  from  quarters  that 
might  produce  the  most  resistance. 

Such  a  policy,  of  course,  would  naturally  be  received  with 
favor  by  such  of  the  bankers  as  desired  to  manage  their  banks  in 
their  own  way,  unhampered  by  law  or  the  interference  of  the 


372  ROMANCE  AND  TRAGEDY  OF  BANKING 

Comptroller.  And  this  view  of  the  matter  appeared  to  be  enter- 
tained by  some  of  the  members  of  the  National  Monetary  Commis- 
sion, as  manifested  on  the  occasion  of  the  hearing  before  that 
body,  where  Mr.  Murray  probably  conceived  the  idea  of  inter- 
fering with  the  banks  as  little  as  possible,  as  it  was  subsequent 
to  that  hearing  that  he  changed  from  an  extremely  radical  to  an 
ultra  conservative  policy. 

If  bankers  did  their  banking  wholly  upon  capital  furnished 
by  themselves  and  their  stockholders,  instead  of  upon  the  money 
of  their  depositors,  they  might  very  properly  claim  the  right  to 
be  let  alone  to  manage  the  affairs  of  their  institutions  in  their 
own  way.  But  when  they  receive  and  accept  a  charter  from  the 
Government  to  do  a  business  within  well-defined  restrictions,  and 
know  what  those  restrictions  are  when  they  accept  them,  it  is 
their  duty  to  conduct  that  business  within  the  limitations  pre- 
scribed by  law  and  to  strictly  observe  the  requirements  of  the 
statute.  And  it  is  the  duty  of  the  administrative  official  who  is 
charged  with  the  supervision  of  the  banks  to  enforce  an  observ- 
ance of  the  laws  regardless  of  whether  it  is  annoying  to  the  banks 
or  not,  or  what  his  own  judgment  may  be  of  the  statutes. 
Directors  of  banks  are  sworn  not  to  violate  the  law  and  the  admin- 
istrative official  is  bound  by  a  similar  oath  to  execute  it.  There 
is  an  obligation  on  both  which  neither  can  evade  without  being 
false  to  his  trust.  The  banker  who  trades  upon  the  confidence 
inspired  by  the  fact  that  his  bank  is  under  governmental  super- 
vision as  a  means  of  securing  the  deposits  of  the  people  in  his 
community,  and  then  objects  to  or  resents  interference  by  the 
Government  in  the  exercise  of  its  supervisory  powers,  maintains 
a  very  inconsistent  and  untenable  position,  to  say  the  least.  And 
the  public  official  who  accepts  and  is  charged  with  the  duty  of 
enforcing  an  observance  of  the  banking  laws  enacted  by  Congress 
in  its  wisdom  for  the  government  of  the  banks  in  the  safe  con- 
duct of  their  business,  and  sets  his  judgment  against  the  will  of 
the  law-making  power  as  expressed  in  such  laws,  by  refusing  to 
enforce  their  observance  because  he  does  not  approve  of  them, 
has  such  an  improper  conception  of  his  duties  and  responsibilities 
as  to  render  him  temperamentally  unfit  to  hold  any  administrative 
or  executive  position  under  the  Government  whose  laws  he  has 


373 

sworn  to  obey  and  execute.  And  when  he  fails  in  his  duty  to  the 
Government  and  the  people  by  neglecting  or  refusing  to  perform 
those  duties  he  becomes  a  law  breaker  himself,  as  much  so  as  the 
banker  who  violates  the  laws  enacted  for  the  government  and 
control  of  his  bank,  and  the  one  should  be  just  as  much  amenable 
to  punishment  as  the  other. 

If  the  laws,  or  any  of  them,  enacted  by  Congress  for  the 
regulation  of  the  banks  are  inadequate,  too  severe,  or  incompatible 
with  banking  or  business  interests,  it  is  for  the  Congress  to 
amend  or  repeal  them  and  not  for  the  administrative  official,  who 
is  charged  with  their  execution,  to  refuse  to  enforce  them,  or  to 
amend  them  by  administrative  regulations.  That  such  laws 
failed  of  enforcement  or  were  amended  by  administrative  regula- 
tions during  Mr.  Murray's  administration,  will  be  demonstrated 
further  on  in  this  volume. 

President  Taft  in  his  public  utterances  on  this  subject  ex- 
pressed himself  very  forcibly  as  follows : 

I  know  that  sometimes  in  the  zest  and  enthusiasm  of 
reform  there  is  an  impatience  with  legal  limitations  and 
statutes  that  seem  to  be  directed  against  that  reform,  or 
to  prevent  its  immediate  accomplishment,  such  as  to  lead 
us  to  disregard  it  or  to  ignore  it. 

The  first  thing  that  we  have  to  do  after  arousing  the 
people  to  the  necessity  of  a  change,  is  to  change  the  law 
and  not  rely  upon  the  executive  himself  to  ignore  the 
statutes  and  follow  a  law  unto  himself  because  it  is 
supposed  to  he  the  law  of  higher  morality. 

If  you  depart  in  any  way  from  the  law  as  it  is,  you  are 
led  into  a  wilderness. 

And  again: 

There  is  a  tendency  among  some  of  our  bi;st  fellow 
citizens  to  hold  the  executive  responsible  for  not  doing  a 
great  many  things  that  it  is  the  business  of  Congress  to  do, 
and  for  the  Executive  only  to  follow  after  they  have  laid 
down  the  rules.  That  does  not  rid  the  executive  of  the 
responsibility  of  recommending  changes  in  the  law.  But  it 


374          ROMANCE  AND  TRAGEDY  OF  BANKING 

does  prevent  him  from  going  ahead  and  executing  those 
changes  without  the  co-ordinate  action  of  the  legislative 
branch  of  the  Government. 

If  this  rule  of  conduct  applies  to  the  Chief  Executive,  and 
under  the  Constitution  of  the  United  States  it  certainly  does, 
how  much  more  forcibly  should  it  apply  to  subordinate  admin- 
istrative and  executive  officials  in  the  service  of  the  Government. 

Numerous  reports  of  examinations  of  banks,  disclosing  viola- 
tions of  law  that  were  passed  by  Mr.  Murray  without  any  action, 
contained  also  recommendations  from  the  examiners  for  a  strong 
letter  of  criticism  to  be  written  by  the  Comptroller,  insisting  upon 
the  immediate  correction  of  objectionable  features  to  which  his 
attention  was  called,  and  which  the  examiners  in  their  individual 
efforts  had  failed  to  have  adjusted  by  the  directors  while  they 
were  in  the  banks.  But  in  a  majority  of  such  cases  no  action  was 
taken  by  the  Comptroller,  so  intent  was  he  in  carrying  out  his 
policy  of  pursuing  the  course  of  least  resistance  by  not  writing 
the  banks  letters  that  were  calculated  to  annoy  them  in  regard  to 
what  he  termed  non-essentials,  but  which  were  absolute  violations 
of  law. 

When  the  trial  of  John  R.  Walsh  was  under  way  in  Chicago, 
a  former  Deputy  Comptroller  of  the  Currency  testified  for  the 
defense  that  in  making  excessive  loans  Walsh  had  done  nothing 
more  than  was  done  by  a  majority  of  the  banks  at  that  time,  with 
the  full  knowledge  of  the  Comptroller,  and  that  violations  of  law 
of  this  nature  were  only  perfunctorily  criticised  by  the  Comp- 
troller's office,  stamped  fac-simile  signatures  being  used  on  circu- 
lar forms  in  calling  the  attention  of  the  banks  to  violations  of 
the  statute.  This  statement  was  true  as  far  as  it  related  to  the 
printed  forms  and  fac-simile  signatures  used  in  calling  attention 
to  violations  of  law  shown  by  reports  of  condition  of  the  banks, 
but  it  was  not  true  in  respect  to  letters  written  on  examiners' 
reports.  And  the  reason  why  forms  were  used  in  the  first  instance 
was  because  of  the  large  number  of  violations  of  law  of  various 
kinds  disclosed  by  reports  of  condition,  which  made  it  a  physical 
impossibility  for  the  limited  force  of  clerks  in  the  Comptroller's 
office  to  write  an  individual  letter  in  each  case.  But  Mr.  Murray 


ROMANCE  AND  TRAGEDY  OF  BANKING  375 

solved  this  problem,  in  pursuance  of  the  course  of  least  resistance, 
by  not  writing  any  letters  at  all  on  reports  of  condition,  no  mat- 
ter what  violations  of  law  were  shown,  thus  reducing  the  number 
of  letters  that  were  previously  written  which  he  considered  of  an 
annoying  character. 

Examiners'  Fees 

National  bank  examiners  were  not  salaried  officers  at  that 
time.  Their  compensation  consisted  of  fees  assessed  against  the 
banks  examined,  and  the  rate  of  such  fees  was  fixed  by  statute. 

All  banks  located  outside  of  reserve  and  central  reserve  cities, 
except  those  hereinafter  mentioned,  were  required  to  pay  a  fee  for 
each  examination  based  upon  the  amount  of  their  capital  stock. 
The  rate  so  fixed  varied  in  amount  from  a  minimum  of  twenty 
dollars  to  a  maximum  of  seventy-five  dollars,  according  to  the 
capital  of  the  bank. 

Banks  located  in  the  States  of  Oregon,  California  and  Nevada, 
and  in  the  States  that  were  Territories  at  the  time  of  the  enact- 
ment of  this  law,  were  excepted  from  the  operation  of  this  provi- 
sion, for  the  reason  that  they  were  so  widely  scattered  and  the 
cost  of  travel  between  them  was  so  great  that  the  fee  based  upon 
the  capital  of  the  associations  would  not  compensate  the  exami- 
ner for  the  time  employed  in  making  the  examinations  and  the 
expenses  of  travel  incurred. 

The  fees  for  examinations  of  banks  in  such  States  and  Terri- 
tories were  therefore  authorized  by  law  to  be  fixed  by  the  Secre- 
tary of  the  Treasury  upon  the  recommendation  of  the  Comptroller 
of  the  Currency,  and  the  rate  so  fixed  was  based  upon  capital 
stock  with  an  additional  allowance  of  one  cent  on  each  thousand 
dollars  of  the  average  gross  assets  of  the  respective  banks  as 
shown  by  their  five  reports  of  condition  during  the  preceding 
year. 

Before  the  corporate  existence  of  any  bank  was  extended,  the 
law  required  a  special  examination  of  the  bank  to  be  made,  "at 
the  expense  of  the  association".  It  was  held  by  the  Comptroller's 
office,  and  very  properly  so,  that  the  provisions  governing  the 
rate  of  fees  for  the  regular  examination  of  banks  did  not  apply  to 
examinations  for  extension  of  charter.  It  was  the  practice, 


376          ROMANCE  AND  TRAGEDY  OF  BANKING 

therefore,  to  allow  the  examiner  the  regular  fee  and  actual  ex- 
penses, or  a  per  diem  of  fifteen  dollars  and  expenses  for  making 
such  examinations. 

The  full  measure  of  the  Comptroller's  authority  to  assess 
banks  for  examinations  was  therefore  limited  to  the  three  provi- 
sions of  law  referred  to. 

When  a  bank  was  found  to  be  in  such  an  unsatisfactory  condi- 
tion that  a  special  examination  was  necessary,  and  the  Comptrol- 
ler deemed  the  statutory  fee  inadequate  to  compensate  the  exam- 
iner for  the  time  employed  and  the  expenses  incurred  in  making 
such  examination,  a  specific  sum  appropriated  by  Congress  was 
at  the  disposal  of  the  Comptroller  to  pay  for  such  examinations, 
and  the  Comptroller  was  free  to  fix  the  rate  of  compensation  in 
such  cases,  chargeable  to  this  fund.  A  per  diem  of  twenty-five 
dollars,  covering  services  and  expenses,  or  fifteen  dollars  a  day 
and  expenses,  was  usually  allowed. 

The  sum  annually  appropriated  for  this  purpose  previous  to 
Mr.  Murray's  assuming  charge  of  the  office,  was  from  five  to 
eight  thousand  dollars.  But  in  the  estimate  for  appropriations 
for  the  Comptroller's  office  he  reduced  this  amount  to  five  thou- 
sand dollars,  and  declared  that  he  did  not  intend  to  use  public 
funds  to  pay  for  the  examination  of  banks.  He  was  advised  that 
the  statutory  fee  was  not  sufficient  to  compensate  an  examiner  for 
making  a  special  examination  of  a  bank  in  an  unsatisfactory 
condition  and  that  it  was  necessary  to  charge  the  expenses  of 
such  examinations  to  this  fund,  which  would  not  be  sufficient  if 
reduced  to  five  thousand  dollars.  He  replied  that  he  would  make 
the  banks  pay  this  expense  as  a  penalty  for  getting  into  such  a 
condition  as  to  make  a  special  examination  necessary,  and  he  pro- 
ceeded to  carry  out  this  unlawful  policy  thereafter. 

Without  any  authority  of  law  for  his  action,  but  in  direct 
disregard  of  law,  and  without  even  the  approval  of  the  Secretary 
of  the  Treasury,  which  the  statute  required  him  to  obtain  as  his 
authority  to  assess  a  bank  for  any  amount  in  excess  of  the  fee 
based  upon  capital,  he  arbitrarily  established  a  special  rate  of 
fees  which  he  made  such  banks  pay,  ranging  in  amount  from 
fifteen  to  twenty-five  dollars  a  day  and  expenses.  Where  the 
statute  fixed  the  fee  at  twenty  or  twenty-five  dollars  for  one  exam- 


ROMANCE  AND  TRAGEDY  OF  BANKING  377 

ination  these  banks  were  assessed  anywhere  from  forty  to  over 
four  hundred  dollars  for  one  examination.  When  a  bank  pro- 
tested against  this  exorbitant  and  unlawful  charge,  as  occasion- 
ally one  did,  the  fee  was  paid  from  the  special  examination 
fund  provided  for  such  purpose.  In  every  case  in  which  this  un- 
lawful fee  was  charged  the  bank  was  in  an  unsatisfactory  condi- 
tion, requiring  several  days  to  examine  it,  and  most  of  them  sub- 
mitted to  this  extortion  because  they  feared  the  exposure  that 
would  result  from  a  protest. 

It  was  for  the  examination  of  this  class  of  banks  that  Con- 
gress provided  the  special  fund  which  Mr.  Murray  declared  he 
would  not  use.  He  did  not  use  it  where  he  could  lawfully  have 
used  it,  in  payment  for  special  examinations,  but  he  did  use  it 
where  he  could  not  lawfully  use  it,  in  payment  for  investigations 
made  by  himself  as  to  the  manner  in  which  bank  examiners  do 
their  work. 

The  provision  of  the  act  appropriating  this  money  read  as 
follows : 

For  expenses  of  special  examinations  of  national  banks. 
and  bank  plates,  of  keeping  the  macerator  in  the  Treasury 
building  in  repair,  and  for  other  incidental  expenses  attend- 
ing the  working  of  the  macerator,  and  for  procuring  informa- 
tion relative  to  banks  other  than  national,  five  thousand 
dollars. 

There  is  no  authority  in  this  provision  of  law  for  the  use  of 
any  part  of  this  fund  to  pay  a  bank  examiner,  or  the  traveling 
expenses  of  the  Comptroller,  for  investigating  the  manner  in 
which  another  examiner  does  his  work,  and  the  use  of  an  appro- 
priation for  purposes  other  than  those  for  which  it  was  specifi- 
cally authorized  was  an  unlawful  diversion  or  use  of  such  funds. 
In  every  case  of  such  investigation  the  regular  examiner  made 
the  examination  of  the  bank,  received  the  statutory  fee  for  the 
examination,  and  all  the  Comptroller  and  the  examiner  who  ac- 
companied him  did  was  to  look  on  or  discuss  banking  questions 
with  the  officers  of  the  bank  while  the  examination  was  in  prog- 
ress. If  this  fund  could  be  lawfully  used  for  such  purposes,  then 
the  appropriation  should  have  been  discontinued,  as  it  would 


378          ROMANCE  AND  TRAGEDY  OF  BANKING 

eventually  become  nothing  but  a  junketing  fund  for  the  use  of 
the  Comptroller  and  his  favored  employees. 

The  misapplication  of  trust  funds  of  insolvent  national  banks 
by  Mr.  Murray  was  no  less  pronounced  than  his  misuse  of  the 
special  examination  fund  and  his  unlawful  assessment  of  fees  for 
examinations.  The  creditors  of  failed  national  banks  were  re- 
quired to  bear  the  expenses  of  an  examiner  for  investigating 
whether  another  examiner  made  proper  examinations  of  the  failed 
bank  prior  to  suspension,  or  neglected  to  discover  and  report  the 
conditions  which  led  to  the  failure,  and  the  funds  of  the  insolvent 
bank  were  charged  with  the  expense  of  such  investigation,  while 
the  law  limited  the  use  of  such  funds  to  the  legitimate  expenses  of 
the  receivership  and  the  payment  of  the  depositors  and  other 
creditors  of  the  failed  bank.  There  was  no  warrant  in  law  for 
the  Comptroller  to  use  any  part  of  such  funds  in  payment  for 
investigations  of  suspected  dereliction  of  duty  on  the  part  of  an 
examiner  in  connection  with  his  examinations  of  the  bank  before 
suspension,  and  every  dollar  so  used  was  an  unlawful  diversion  of 
the  funds  of  the  failed  institution  and  diminished  the  amount  re- 
turned to  the  depositors  and  stockholders. 

Another  practice  inaugurated  during  Mr.  Murray's  adminis- 
tration was  the  detailing  of  favored  salaried  employees  to  make 
examinations  of  banks  and  allowing  them  a  per  diem  and  expenses 
in  lieu  of  their  salaries,  by  assessment  upon  the  banks.  As  this 
allowance  did  not  come  out  of  the  Treasury  of  the  United  States 
no  vouchers  were  rendered  to  the  Government  for  such  bills,  con- 
sequently they  did  not  have  to  pass  the  scrutiny  of  the  accounting 
officers  of  the  Treasury  Department,  otherwise  the  fact  that  sal- 
aried officers  were  receiving  extra  compensation  for  services 
rendered  in  time  which  belonged  to  the  Government  would  have 
been  disclosed. 

Such  a  practice  was  not  only  demoralizing  to  the  office  force 
because  of  the  jealousies  it  engendered  between  the  favored  few 
and  the  employees  who  were  not  so  favored,  but  was  detrimental 
to  the  public  service  by  reason  of  the  absence  from  their  regular 
duties  of  those  who  were  employed  and  paid  for  attending  to  the 
current  business  of  the  bureau.  It  was  also  an  infringement  upon 
the  legitimate  work  of  the  regular  examiners  who  were  commis- 


ROMANCE  AND  TRAGEDY  OF  BANKING  379 

sioned  for  the  express  purpose  of  making  such  examinations,  and 
who,  in  most  instances,  could  have  done  the  work  at  less  expense 
to  the  banks  in  time  and  travel. 


Characteristics  of  Murray's  Administration 

A  marked  characteristic  of  Mr.  Murray's  exploitations  of  his 
so-called  reformatory  measures  was  the  reflections  that  he  invari- 
ably cast  upon  the  methods  or  policies  of  his  predecessors,  in 
making  public  announcement  of  his  reforms,  and  the  inference 
that  such  announcements  conveyed  that  everything  that  he  did 
was  right  and  everything  that  they  had  done  was  wrong.  This 
applies  also  to  the  interpretation  of  the  banking  statutes  which 
had  been  in  existence  for  forty-four  years  at  the  time  Mr.  Murray 
assumed  charge  of  the  Currency  bureau,  and  had  been  almost 
uniformly  construed  by  the  courts  and  by  such  able  men  as 
McCulloch  and  the  long  line  of  practical  and  experienced  bankers 
and  financiers  who  followed  him  and  preceded  Mr.  Murray,  whose 
decisions  had  been  adopted  as  the  settled  interpretation  of  the 
law  for  the  guidance  of  the  bureau  in  its  administration.  But 
Mr.  Murray  changed  all  this. 

The  function  of  instructing  the  banks,  which  before  the  ad- 
vent of  Mr.  Murray  had  been  exercised  only  by  the  Comptroller, 
was  delegated  to  the  examiners,  with  the  result  that  instead  of 
having  a  uniform  interpretation  of  the  statutes  to  all  banks  alike 
in  the  application  of  the  law  to  their  varied  transactions,  each 
bank  examiner  of  the  constantly  changing  force  of  about  one 
hundred  interpreted  the  law  to  the  banks  on  his  list  for  examina- 
tion according  to  his  individual  ideas.  So  that  ultimately  there 
were  almost  as  many  different  constructions  of  one  section  of  the 
statute  as  there  were  examiners  in  the  service.  And  when  the 
examiners  in  the  various  examination  districts  were  alternated 
the  natural  consequence  of  such  a  policy  manifested  itself  in  a 
conflict  of  interpretations  of  the  law  and  of  the  position  of  the 
Comptroller.  This  led  to  confusion,  especially  among  the  newer 
banks  in  the  system,  as  to  what  the  settled  policy  or  practice  of 
the  office  was  or  whose  advice  or  direction  they  should  follow.  It 
was  not  infrequent  that  the  office  received  requests  for  advice  or 


380  ROMANCE  AND  TRAGEDY  OF  BANKING 

instructions,  either  by  mail  or  in  person,  from  bankers  who  called 
attention  to  the  conflicting  positions  of  examiners  on  the  same 
question. 

Mr.  Murray's  administration  was  also  distinguished  from 
that  of  any  of  his  predecessors  by  his  spectacular  advertising 
of  every  change  that  he  made  in  old  methods  and  every  new  ruling 
or  regulation  that  he  put  in  force.  And  long  before  the  examiners 
received  any  official  notification  of  such  rulings  or  regulations, 
they  were  advised  of  the  contemplated  action  through  the  press 
of  the  country,  financial  journals  or  monthly  circular  letters 
issued  by  some  of  the  metropolitan  banks. 

Nor  was  he  at  all  backward  in  promulgating  as  reforms  orig- 
inated by  himself  administrative  practices  that  had  been  in  force 
in  the  bureau  long  before  he  became  Comptroller  and  had  worked 
satisfactorily  and  successfully  without  any  publicity  or  stage 
settings. 

For  instance,  one  of  the  first  reforms  announced  by  Mr.  Mur- 
ray was  his  purpose  to  appoint  a  few  examiners-at-large,  whose 
duty  it  would  be  to  examine  banks  that  were  in  a  dangerous  or 
unsatisfactory  condition  and  to  remain  at  the  bank  until  all  ob- 
jectionable matters  were  satisfactorily  adjusted. 

The  publicity  given  this  plan  and  the  names  of  the  examiners 
so  designated  advertised  the  fact  that  any  bank  examined  by  an 
examiner-at-large  was  regarded  as  being  in  a  bad  or  unsatis- 
factory condition,  and  the  presence  of  such  an  examiner  in  the 
bank  was,  therefore,  a  notice  to  the  other  banks  in  that  commu- 
nity that  it  was  so  considered.  Banks  in  the  same  city,  town  or 
vicinity  usually  know  of  the  presence  of  an  examiner  in  any  one 
of  the  neighboring  banks  and  of  the  frequency  of  his  visits. 

A  particularly  bad  feature  of  this  plan  that  was  called  to  Mr. 
Murray's  attention  at  the  time  he  adopted  it,  but  without  effect, 
was  the  fact  that  the  examiners-at-large  were  so  addressed  in  the 
official  correspondence  they  received  from  the  office,  and  so  signed 
themselves  in  their  communications  to  other  banking  institutions 
in  verifying  the  accounts  of  the  bank  under  examination,  thus 
further  advertising  the  fact  that  the  latter  bank  was  being  exam- 
ined by  an  examiner-at-large  and  must,  therefore,  be  in  an  unsat- 


ROMANCE  AND  TRAGEDY  OF  BANKING  381 

isfactory  condition.  Such  publicity  naturally  worked  to  the  in- 
jury of  the  bank. 

There  was  no  authority  of  law  for  the  appointment  of  an 
examiner-at-large,  nor  for  the  designation  of  a  bank  examiner  by 
such  a  title.  There  was  no  such  title  provided  by  statute.  The 
title  was  simply  a  creation  of  Mr.  Murray's,  a  high-sounding  des- 
ignation which  implied  unusual  powers  which  the  examiner  did  not 
possess  over  the  ordinary  examiner.  The  duties  performed  by 
these  so-called  examiners-at-large  did  not  differ  in  any  respect 
from  the  same  duties  quietly  performed  under  previous  Comp- 
trollers by  the  regular  examiners.  Under  former  Comptrollers  it 
had  been  the  practice  for  years  to  assign  banks  that  were  in  such  a 
condition  as  to  require  special  attention  to  one  of  the  most  effi- 
cient men  on  the  force,  who  had  special  qualifications  for  and  ex- 
perience in  handling  and  adjusting  difficult  situations.  These 
examiners  were  paid  a  per  diem  of  twenty-five  dollars,  which  in- 
cluded expenses,  from  the  special  examination  fund  appropriated 
by  Congress  for  that  purpose,  while  Mr.  Murray  allowed  his 
examiners-at-large  a  per  diem  of  from  fifteen  to  twenty-five 
dollars,  and  in  one  case  fifty  dollars  and  expenses  in  addition, 
and  authorized  them  to  present  their  bills  to  the  banks  for  pay- 
ment, without  any  authority  of  law  for  so  doing.  These  bills 
amounted  to,  in  some  cases,  from  two  to  four  hundred  dollars 
for  an  examination. 

Another  reform  which  was  freely  advertised  as  having  been 
originated  by  Mr.  Murray  was  in  securing  the  co-operation  of  the 
State  banking  authorities  with  the  national  bank  examiners  in 
making  joint  or  simultaneous  examinations  of  state  and  national 
banks  occupying  the  same  or  communicating  quarters,  in  order 
to  prevent  any  commingling  of  the  assets  of  the  two  institutions, 
or  the  use  of  the  assets  of  one  by  the  other,  as  was  possible  when 
each  bank  was  examined  separately  on  different  dates. 

The  practice  of  making  simultaneous  examinations  whenever 
they  could  be  arranged  between  state  and  national  examiners  pre- 
vailed in  the  Comptroller's  office  for  years  before  Mr.  Murray 
became  Comptroller,  and  the  national  examiners  were  instructed 
when  they  could  not  arrange  with  the  state  examiner  for  a  joint 
examination  to  endeavor  to  obtain  from  the  state  institution 


ROMANCE  AND  TRAGEDY  OF  BANKING 

authority   to   examine   it   at   the  same   time   they   examined   the 
national  bank. 

There  was  nothing  new  or  novel,  therefore,  in  this  so-called 
reform,  except  the  publicity  given  the  reiteration  of  old  instruc- 
tions and  the  originality  claimed  therefor. 

Another  reform  that  was  extensively  advertised  was  the  divi- 
sion of  the  country  at  large  into  eleven  examination  districts, 
and  the  placing  of  an  examiner  at  the  head  of  each  district,  who 
was  called  a  district  chairman,  as  distinguished  from  an  examiner- 
at-large.  The  examiners  who  covered  the  territory  comprising 
these  several  districts  were  at  first  instructed  to  hold  conventions 
in  January  and  July  of  each  year  in  their  respective  districts  and 
exchange  views  generally  on  the  subject  of  bank  examinations. 
These  meetings  were  subsequently  reduced  to  one  each  year  be- 
cause of  the  expense  they  entailed  upon  the  examiners. 

In  1887  Comptroller  Trenholm  advocated  this  same  idea  in 
his  annual  report  to  Congress  for  that  year,  but  suggested  an 
annual  meeting  to  be  held  in  Washington,  and  recommended  that 
an  appropriation  be  made  to  defray  the  traveling  expenses  of  the 
examiners  for  attendance  at  such  meetings. 

At  one  time  since  then  a  movement  was  started  among  the 
examiners  to  organize  themselves  into  an  association  and  to  hold 
a  convention  each  year  at  the  same  time  and  place  that  the 
American  Bankers'  Association  assembled.  But  nothing  resulted 
from  this  movement  as  Congress  would  not  provide  the  funds 
from  which  to  defray  the  expenses,  and  the  examiners  could  not 
afford  to  bear  the  expense  themeslves  or  lose  the  time  from  their 
work  in  attending  such  meetings. 

Mr.  Murray,  however,  overcame  all  these  obstacles  by  arbi- 
trarily grouping  the  examiners  into  sections  and  ordering  them 
to  attend  these  district  meetings  at  their  own  expense  under 
penalty  of  suspension  if  they  failed  to  do  so. 

The  examiners  were  not  salaried  officers  at  that  time.  They 
were  paid  only  for  the  time  actually  engaged  in  the  examination 
of  banks  and  any  loss  of  time  meant  a  corresponding  reduction  in 
their  earnings.  It  was  a  great  hardship,  therefore,  for  an  exam- 
iner to  be  compelled  to  attend  the  district  meetings  at  a  loss  of 
compensation  and  the  additional  expense  of  travel,  and  most  of 


ROMANCE  AND  TRAGEDY  OF  BANKING  383 

them  complained  very  bitterly  of  Mr.  Murray's  arbitrary  action 
in  compelling  their  atendance.  They  also  complained  that  the 
additional  labor  imposed  upon  them  in  the  preparation  of  essays 
to  be  read  and  discussed  at  such  meetings  and  other  data  relative 
to  the  banking  conditions  in  their  respective  districts  involved 
an  additional  money  loss  to  them  in  time  and  interfered  with 
and  delayed  their  regular  work. 

The  consensus  of  opinion  of  the  examiners  in  regard  to  these 
meetings  was  that  while  there  was  some  little  benefit  to  be  de- 
rived from  an  interchange  of  views,  the  meetings  resolved  them- 
selves into  mere  social  gatherings  which,  while  very  enjoyable  and 
expensive,  enabled  the  examiners  to  become  acquainted  with  each 
other,  but  were  of  no  practical  benefit. 

Comptroller  Trenholm's  plan  to  have  the  examiners  meet  once 
a  year  in  Washington,  and  for  Congress  to  authorize  their  travel- 
ing expenses  to  be  paid  out  of  public  funds,  was  a  more  practical 
proposition,  as  far  as  the  accomplishment  of  beneficial  results  was 
concerned,  as  the  examiners  would  then  have  been  brought  in 
close  touch  with  the  Comptroller's  office  and  the  contact  would 
have  been  mutually  beneficial. 

The  establishment  and  maintenance  of  a  credit  system  in  the 
Comptroller's  office  on  an  elaborate  scale  was  another  reform  that 
was  extensively  heralded  by  Mr.  Murray. 

This  plan  contemplated  the  keeping  of  a  record  of  the  names 
and  financial  responsibility  of  all  borrowers  whose  paper  in  excess 
of  five  thousand  dollars  was  found  in  the  more  than  seven  thou- 
sand banks.  This  scheme  was  an  excellent  one  in  theory,  but  it 
was  wholly  impracticable,  as  any  one  on  a  moment's  reflection 
could  readily  understand. 

In  the  first  place,  a  record  of  this  character  to  be  of  any 
use  at  all  would  have  to  be  accurate,  and  to  keep  it  accurately  it 
would  have  to  show  the  constantly  changing  amount  and  charac- 
ter of  the  paper  of  any  one  maker  on  a  given  date,  in  order  to 
determine  his  aggregate  liabilities  and  whether  or  not  they  ex- 
ceeded his  financial  worth. 

If  all  the  national  banks  of  the  country  were  examined  on  the 
same  date,  or  if  the  banks  were  to  list  the  names  of  all  their  bor- 
rowers and  the  amount  of  each  loan  and  discount  in  their  reports 


384  ROMANCE  AND  TRAGEDY  OF  BANKING 

of  condition  for  a  given  date,  it  would  be  possible  for  a  force  of 
clerks  equal  in  number  to  the  force  employed  in  the  Comptroller's 
office  to  abstract  such  reports  and  to  get  a  line  on  the  aggregate 
amount  of  credit  extended  to  each  borrower  in  all  the  banks.  But 
what  material  or  practical  use  would  a  record  of  that  character 
be  by  the  time  it  was  completed.  By  the  time  the  returns  were 
tabulated  a  large  percentage  of  the  notes  would  have  been  paid 
and  others  would  have  taken  their  place  for  different  amounts, 
either  of  the  same  or  other  makers.  So  that  the  only  way  to 
make  such  a  record  reliable  and  useful  would  be  for  the  banks  to 
report  daily  to  the  Comptroller  by  wire  all  payments  and  renewals 
of  notes  and  new  loans  made  to  enable  him  to  post  the  changes 
promptly  in  his  liability  record.  The  magnitude  and  utter  im- 
practicability of  such  a  scheme  is  self-evident  and  needs  no  fur- 
ther comment. 

For  years  before  Mr.  Murray  became  Comptroller  it  had 
been  the  practice  of  the  Comptroller's  office  to  keep  a  line  on 
borrowers  whose  paper  was  found  running  through  a  number  of 
banks  in  the  same  locality,  or  in  the  same  section  of  the  country, 
as  shown  by  the  reports  of  national  bank  examiners,  for  the  pur- 
pose of  determining  the  aggregate  liabilities  of  any  borrower  and 
to  check  his  borrowings  when  found  to  exceed  the  limit  of  his 
financial  responsibility. 

It  was  the  elaboration  of  this  limited  scheme  that  suggested 
to  Mr.  Murray  the  gigantic  and  impossible  undertaking  of  estab- 
lishing an  extensive  credit  record  for  the  whole  United  States, 
such  as  the  public  were  given  to  understand  it  was  the  purpose  of 
the  Comptroller's  office  to  maintain. 

In  December,  1909,  Mr.  Murray  sent  a  circular  letter  to  all 
the  bank  examiners  requesting  them  to  report  to  him  whether  or 
not  there  were  any  banks  in  their  respective  districts  that  were 
believed  to  be  in  an  unsatisfactory  or  dangerous  condition. 

In  February,  1910,  he  made  the  public  declaration,  purport- 
ing to  be  based  upon  the  replies  received  from  the  examiners  to 
this  inquiry,  that  at  that  time  there  was  practically  not  a  na- 
tional bank  in  the  entire  country  that  was  regarded  by  the  exam- 
iners as  being  in  an  unsatisfactory  condition.  He  stated  further 
that  for  many  years  before  he  took  charge  of  the  Currency 


ROMANCE  AND  TRAGEDY  OF  BANKING  385 

bureau  it  had  been  the  practice  to  carry  a  list  of  several  hundred 
banks  that  were  regarded  as  either  in  an  unsound  condition  or  so 
poorly  managed  as  to  require  very  close  watching,  and  that 
although  efforts  were  made  to  improve  the  condition  of  these  as- 
sociations they  were  successful  in  only  a  few  instances.  He  then 
proceeded  to  claim,  through  the  press  and  financial  journals  of 
the  country,  that  because  of  the  successful  working  out  of  the 
various  reformatory  measures  which  had  been  a  feature  of  his 
administration  a  complete  rehabilitation  of  the  unsound  and 
poorly  managed  banks  had  been  effected  and  that  there  was  then 
not  a  bank  left  on  what  was  termed  the  "bad  bank"  list. 

In  making  this  statement  Mr.  Murray  not  only  cast  an  un- 
just and  unwarranted  reflection  upon  the  administrations  of  his 
immediate  predecessors,  but  misrepresented  the  actual  condition 
shown  by  the  returns  received  from  the  examiners  to  the  circular 
letter  of  inquiry  sent  them. 

It  had  been  the  practice  for  a  number  of  years  for  the  Comp- 
troller or  the  Deputy  Comptroller  to  keep  on  his  desk  a  list  of  the 
banks  that  were  in  an  unsatisfactory  condition  and  the  date  of  the 
last  examination  of  each.  These  banks  were  scheduled  for  exami- 
nation every  three  months  and  this  list  was  kept  for  the  purpose 
of  closely  watching  these  banks  and  guarding  against  any  of 
them  being  overlooked.  Mr.  Murray  abandoned  this  list  and  sub- 
stituted therefor  what  he  termed  a  "bad  bank  desk",  to  which  was 
assigned  every  bank  that  was  in  an  unsatisfactory  condition,  and 
the  clerk  in  charge  of  that  desk  was  relied  upon  to  look  after  such 
banks  and  see  that  they  were  promptly  examined  at  the  stated 
time.  The  result  of  this  change  was  that  there  were  so  many 
banks  assigned  to  this  desk  and  so  few  examiners-at-large  to  ex- 
amine them  that  many  of  them  were  not  examined  as  frequently  as 
they  would  have  been  had  they  been  examined  in  their  regular 
order  every  six  months,  and  some  of  these  banks  subsequently 
failed  and  at  the  date  of  failure  had  not  been  examined  for  twelve 
months. 

A  compilation  of  the  reports  received  from  the  examiners  in 
reply  to  Mr.  Murray's  circular  letter  of  inquiry  showed  that  at 
that  time  there  were  just  as  many  banks  in  the  respective  districts 
of  the  examiners  that  were  in  an  unsatisfactory  condition  as  there 


386          ROMANCE  AND  TRAGEDY  OF  BANKING 

ever  were  under  any  previous  administration  during  normal  times, 
and  a  number  of  them  were  so  near  a  condition  of  insolvency  that 
in  order  to  avoid  a  receivership  they  were  forced  into  liquidation. 

There  always  has  been  a  certain  percentage  of  the  total  num- 
ber of  banks  in  active  operation  at  a  given  date  in  a  more  or  less 
unsatisfactory  condition,  requiring  frequent  examination  and 
special  watchfulness,  the  number  varying  only  with  the  business 
conditions  of  the  country.  This  always  has  been  and  probably 
always  will  be  the  case  under  our  present  banking  system.  It 
was  so  throughout  Mr.  Murray's  administration  to  as  great  an 
extent  as  during  the  administrations  of  any  of  his  predecessors, 
under  similar  conditions. 

Perhaps  the  most  faulty  of  all  of  Mr.  Murray's  many  so- 
called  administrative  reforms,  and  the  one  that  involved  the  great- 
est disregard  of  law  and  the  rights  of  shareholders  in  the  banks, 
was  his  method  of  forcing  banks  that  were  in  an  unsatisfactory 
or  insolvent  condition  into  liquidation  to  avoid  receivership. 

Section  5220  of  the  Revised  Statutes  of  the  United  States 
confers  upon  the  shareholders  of  a  bank  the  right  to  place  the 
bank  in  voluntary  liquidation  at  any  time  by  a  vote  of  two-thirds 
of  the  stock.  There  is  no  authority  vested  in  the  Comptroller  of 
the  Currency  to  compel  a  bank  to  go  into  liquidation.  If  the 
officers  or  directors  of  a  bank  violate  the  law  he  has  the  right  to 
institute  a  suit  to  forfeit  the  charter  of  the  association,  but  the 
court  must  determine  whether  or  not  the  bank's  franchise  shall 
be  declared  forfeited. 

The  law  also  provides  that  whenever  the  Comptroller  shall  be- 
come satisfied  of  the  insolvency  of  any  bank  he  may,  after  due 
examination  of  its  affairs,  appoint  a  receiver,  close  up  its  busi- 
ness and  enforce  the  personal  liability  of  the  shareholders  for  any 
deficiency  in  the  assets  to  pay  liabilities  to  depositors  and  other 
creditors.  Under  the  general  direction  of  the  Comptroller  the 
receiver  is  required  to  take  possession  of  the  books,  records  and 
assets  of  the  bank,  collect  all  debts,  dues  and  claims  belonging  to 
it,  and,  upon  the  order  of  a  court  of  record  of  competent  juris- 
diction, sell  or  compound  all  bad  or  doubtful  debts.  In  short,  the 
receiver  is  required  to  reduce  the  assets  of  the  bank  to  cash  and 
make  a  pro  rata  distribution  of  the  proceeds  to  the  creditors  of 


ROMANCE  AND  TRAGEDY  OF  BANKING  387 

the  association.  If  anything  remains  after  the  debts  of  the  asso- 
ciation are  paid  in  full  with  interest,  it  reverts  to  the  stockholders. 

Mr.  Murray  ignored  these  provisions  of  law.  When  the  cap- 
ital of  a  bank  became  badly  impaired,  instead  of  ordering  an  as- 
sessment upon  the  stockholders  and  giving  them  the  right  to  make 
the  capital  good  or  to  place  the  association  in  liquidation  as  pro- 
vided by  law,  he  ordered  an  examiner-at-large  to  proceed  immedi- 
ately to  the  bank  and  to  require  the  directors  to  restore  the  capi- 
tal without  delay  or  to  take  immediate  steps  to  place  the  bank  in 
liqudation. 

At  the  hearing  before  the  National  Monetary  Commission  Mr. 
Murray  opposed  the  recommendation  made  by  the  Deputy  Comp- 
troller for  an  amendment  to  the  law  authorizing  the  Comptroller 
to  close  and  take  temporary  possession  of  a  bank  when  its  capital 
became  badly  impaired,  pending  a  reorganization  and  readjust- 
ment of  its  affairs.  He  declared  that  such  a  proposition  was  too 
drastic.  But  subsequently,  as  part  of  his  administrative  policy, 
and  without  any  authority  of  law,  he  proceeded  to  exercise  a 
power  over  banks  with  an  impaired  capital  far  more  drastic  than 
anything  that  was  contemplated  by  the  amendment  to  the  law 
proposed. 

After  Mr.  Murray  made  his  misleading  announcement  that 
as  a  result  of  his  reforms  there  was  not  a  national  bank  in  the 
entire  country  that  could  be  said  to  be  in  a  bad  condition,  and 
that  bank  failures  were  a  thing  of  the  past,  the  average  number 
of  insolvent  banks  developed  each  year,  and  in  order  to  conceal 
the  fact  that  these  banks  were  actual  failures,  instead  of  appoint- 
ing a  receiver  for  them  as  provided  by  law,  they  were  coerced  into 
liquidation. 

The  articles  of  association  of  the  banks  that  have  been  char- 
tered in  recent  years  require  the  directors  to  give  a  thirty  days' 
notice  of  a  meeting  of  the  stockholders  by  publication  in  a  news- 
paper published  in  the  city,  town  or  county  in  which  the  bank  is 
located,  or  by  mailing  to  each  shareholder  a  notice  in  writing 
thirty  days  before  the  time  fixed  for  the  meeting,  in  order  that  all 
the  stockholders  may  be  present  either  in  person  or  by  proxy. 
The  annual  meeting  of  stockholders  for  the  election  of  directors, 
which  the  law  requires  to  be  held  in  the  month  of  January,  on  the 


388          ROMANCE  AND  TRAGEDY  OF  BANKING 

date  specified  in  the  articles  of  association,  is  the  only  meeting 
of  stockholders  which  does  not  require  a  thirty  days'  notice,  but  if 
any  business  other  than  the  annual  election  of  directors  is  to  be 
transacted  at  such  meeting,  thirty  days'  previous  notice  is  also 
required.  In  no  other  way  can  a  legal  meeting  of  the  stockholders 
of  a  bank  be  held,  unless  this  notice  is  unanimously  waived,  or  all 
the  stock  is  represented  at  the  meeting. 
Cook  on  Corporation  Law  states  that : 

If  the  time  and  place  at  which  a  corporate  meeting  is 
to  be  held  and  the  business  to  be  transacted  are  distinctly 
fixed  in  the  charter  or  by  a  by-law,  this  is  of  itself  sufficient 
notice  to  all  the  stockholders,  and  no  further  call  or  notice 
of  that  meeting  is  necessary,  unless  the  charter  or  by-laws 
require  it.  But  a  by-law  which  fixes  the  day  of  meeting 
without  also  fixing  the  hour  is  insufficient  as  a  notice  of 
the  meeting.  And  it  is  a  general  and  settled  rule  of  law 
that  notice,  in  some  way  or  other,  must  be  given  to  every 
person  entitled  to  be  present  at  a  corporate  meeting. 
When,  therefore,  no  sufficient  notice  is  given  by  charter  or 
statute  or  by-law,  each  stockholder  is  entitled  to  an  ex- 
press notice  of  every  corporate  meeting.  No  usage  can 
operate  to  excuse  a  failure  to  give  such  a  notice.  These 
rules  are  based  on  the  necessity  of  protecting  the  rights 
of  stockholders,  and  especially  of  the  minority. 

A  provision  in  the  articles  of  association  of  a  bank  has  all 
the  force  of  law,  and  neither  the  Comptroller  of  the  Currency  nor 
the  board  of  directors  of  the  institution  has  any  more  authority 
to  waive  or  disregard  a  requirement  of  the  articles  than  they  have 
to  waive  or  disregard  a  provision  of  the  statutes. 

In  forcing  banks  into  liquidation,  whether  solvent  or  insolvent, 
without  due  notice  to  all  of  the  stockholders  of  a  meeting  called 
for  that  purpose,  Mr.  Murray  and  the  directors  of  the  bank  ex- 
ceeded their  authority  under  the  law,  and  the  stockholders  in 
every  such  instance  who  were  not  notified  and  were  not  present  at 
the  meeting  in  person  or  by  proxy  had  the  right  of  redress 
through  the  courts. 

In  furtherance  of  the  policy  of  avoiding  receiverships  and  in 
support  of  his  pronunciamento  that  bank  failures  were  a  thing  of 


389 

the  past,  in  some  instances  insolvent  banks  were  put  in  liquidation 
over  night  and  a  new  national  association  was  organized  in  a  day 
in  the  same  place  for  the  purpose  of  taking  over  the  assets  of  a 
failed  bank  and  assuming  its  liabilities  to  depositors.  In  some  in- 
stances banks  were  forced  into  liquidation  without  even  the  two- 
thirds  vote  of  the  stock  required  by  law,  some  of  the  proxies  neces- 
sary to  make  up  the  two-thirds  not  having  been  received  until 
after  the  vote  to  liquidate  had  been  taken. 

Section  5136  of  the  Revised  Statutes  of  the  United  States 
provided  that  upon  duly  making  and  filing  articles  of  association 
and  an  organization  certicate  in  the  office  of  the  Comptroller  the 
association  should  become,  as  from  the  date  of  the  execution  of 
the  organization  certificate,  a  body  corporate,  and  Section  5140 
provided  that  before  a  bank  should  be  authorized  to  commence 
business  at  least  fifty  per  cent,  of  the  capital  stock  should  be  paid 
in,  and  that  such  payment  should  be  certified  to  the  Comptroller, 
under  oath,  by  the  president  or  cashier  of  the  bank. 

In  some  instances  the  Comptroller's  certificate  of  authority 
for  a  new  bank  to  begin  business  was  issued  before  a  single  paper 
had  been  filed  in  the  office,  not  even  a  formal  application  for  au- 
thority to  organize  the  bank,  action  having  been  taken  upon  tele- 
graphic advice  from  the  examiner  that  all  of  the  necessary  papers 
had  been  executed  and  the  requisite  amount  of  capital  subscribed 
for  and  paid  in.  In  such  cases  several  days  elapsed  before  the 
organization  papers  were  filed  and  when  received  were  found  to  be 
imperfect  or  incomplete.  In  the  meantime  the  bank  had  been 
opened  and  was  doing  business. 

In  other  cases  where  longer  time  was  required  to  perfect  the 
new  organization,  or  negotiations  to  that  end  had  failed,  the  in- 
solvent bank  was  allowed  to  remain  open  a  week  or  more,  with 
knowledge  of  its  insolvency,  and  in  the  meantime  some  depositors 
who  were  aware  of  its  condition  were  permitted  to  withdraw  their 
deposits,  while  others  who  knew  nothing  of  the  situation  con- 
tinued to  put  money  into  the  institution. 

In  order  to  bolster  up  some  of  the  doubtful  or  worthless  assets 
taken  over  by  the  new  association,  the  officers  or  directors  of  the 
failed  institution  were  coerced  by  the  examiner  into  giving  mort- 
gages or  other  security  on  their  individual  property,  or  required 


390          ROMANCE  AND  TRAGEDY  OF  BANKING 

to  pay  notes  or  overdrafts  under  a  threat  of  criminal  prosecution 
for  violations  of  law  if  they  did  not  comply  with  the  examiner's 
demand. 

The  following  is  a  specimen  of  the  communications  received 
from  the  examiner  who  did  this  class  of  work  for  Mr.  Murray: 

I  called  in  every  doubtful  borrower  that  could  be  reached 
and  informed  him  that  if  he  did  not  satisfactorily  arrange 
for  the  payment  of  his  indebtedness  to  the  bank  I  would 
consider  reporting  the  facts  to  the  District  Attorney  for 
such  action  as  he  might  take.  As  the  people  in  this  State 
are  very  much  afraid  of  the  Federal  Judge,  this  bluff 
'worked  so  beautifully  that  I  was  able  to  commence  to  pay 
my  depositors  on  Thursday  morning. 

When  the  attention  of  this  examiner  was  called  to  his  un- 
lawful and  reprehensible  methods  he  declared  that  he  did  not  care 
what  the  law  required  so  long  as  he  accomplished  his  purpose  of 
not  allowing  a  bank  to  go  into  the  hands  of  a  receiver,  and  those 
officials  of  the  Comptroller's  office  who  dissented  to  such  pro- 
cedures were  regarded  as  representatives  of  old  methods  and  not 
in  sympathy  with  Mr.  Murray's  policies. 

This  examiner  was  subsequently  indicted  and  became  a  fugi- 
tive from  justice,  having  fled  to  Europe  before  the  World  War. 

These  and  other  loose  and  unlawful  practices  were  indulged  in 
by  examiners  and  countenanced  by  Mr.  Murray  during  his  admin- 
istration in  furtherance  of  his  modern  methods  of  supervision, 
which  appeared  to  recognize  no  law  other  than  that  the  end  justi- 
fies the  means. 

One  of  the  worst  features  of  this  policy  of  liquidating  insol- 
vent banks,  or  banks  that  were  in  an  otherwise  unsatisfactory 
condition,  was  the  fact  that  the  institution  was  allowed  to  remain 
in  the  hands  of  the  men  who  were  responsible  for  its  failure  or  its 
unsatisfactory  condition,  thus  affording  them  ample  opportunity 
to  cover  up  any  criminal  wrongdoing  they  may  have  been  guilty 
of,  and  to  escape  also  their  civil  liability  for  any  losses  or  damages 
the  bank  may  have  sustained  by  reason  of  their  violations  of  law. 

When  the  capital  of  a  national  bank  became  impaired  by 
losses  or  otherwise  the  law  gave  the  stockholders  the  option  of 


ROMANCE  AND  TRAGEDY  OF  BANKING  391 

making  the  impairment  good  by  assessment  of  the  stock,  or  the 
alternative  of  placing  the  association  in  liquidation  by  a  vote  of 
two-thirds  of  the  stock.  If  they  voted  to  assess  the  stock,  they 
had  three  months  under  the  law  in  which  to  pay  in  the  assessment. 

Mr.  Murray  insisted  upon  the  immediate  restoration  of  the 
capital,  or  the  immediate  liquidation  of  the  bank,  and  in  a  number 
of  instances  directors  were  coerced  into  taking  the  latter  course 
because  of  his  insistence  upon  such  action,  and  the  stockholders 
were  thus  denied  the  right  to  exercise  the  discretion  conferred 
upon  them  by  law. 

If  a  bank  became  insolvent  and  could  not  be  immediately  re- 
stored to  solvency,  the  law  required  the  Comptroller  to  appoint 
a  receiver  for  the  association  and  directed  the  course  that  should 
be  pursued  in  liquidating  its  affairs. 

In  a  number  of  cases  of  insolvency  Mr.  Murray  persistently 
refused  to  appoint  receivers,  in  support  of  his  declaration  that 
bank  failures  were  occurrences  of  the  past,  and  that  receivers 
would  be  unnecessary  during  his  administration.  Such  banks 
were  permitted  to  be  liquidated  by  their  stockholders  or  by  an- 
other banking  institution  in  the  same  place. 

If  an  officer  or  director  of  a  bank  wilfully  violated  the  law,  the 
penalty  prescribed  by  the  statutes  was  forfeiture  of  the  charter 
of  the  association,  to  be  determined  by  suit  brought  for  that  pur- 
pose by  the  Comptroller  in  his  own  name. 

Mr.  Murray  demanded  and  insisted  upon  the  removal  of  any 
officer  or  the  resignation  of  any  director  who  violated  the  law  by 
making  excessive  loans  or  doing  any  other  unlawful  act,  thus  exer- 
cising a  power  which  Congress  had  persistently  refused  to  confer 
upon  the  Comptroller,  notwithstanding  the  fact  that  several 
Comptrollers  had  recommended  legislation  granting  such  author- 
ity. Directors  of  banks  are  elected  by  the  stockholders  for  a 
period  of  one  year,  and  the  board  is  authorized  to  appoint  its 
officers  and  remove  them.  Nowhere  in  the  law  was  any  authoriity 
conferred  upon  the  Comptroller  of  the  Currency  to  remove  or  to 
demand  the  removal  or  resignation  of  an  officer  or  director.  Mr. 
Murray  assumed  this  power  and  when  such  a  demand  was  made  it 
was  generally  complied  with  through  fear  of  the  injurious  effect 
upon  the  bank  of  frequent  examinations  which  were  threatened  if 


392  ROMANCE  AND  TRAGEDY  OF  BANKING 

his  demand  was  not  complied  with.  In  one  case  at  least  the  Comp- 
troller was  required  to  revoke  his  demand  for  the  removal  of  an 
officer  because  of  threatened  civil  action  by  the  objectionable  of- 
ficer for  damages. 

Bank  examinations  in  the  main  were  a  great  deal  more  effec- 
tive during  Mr.  Murray's  administration  than  formerly.  That 
such  was  the  case  was  due  to  the  fact  that  he  instructed  the  exam- 
iner to  convene  the  directors  at  the  time  of  examination  and  re- 
quire them  to  correct  as  fully  as  possible  all  unsatisfactory  con- 
ditions before  he  left  the  bank.  In  other  words,  the  examiner  was 
required  to  have  done  under  his  personal  direction  what  other 
Comptrollers  undertook  to  accomplish  by  the  slower  process  of 
correspondence  based  upon  the  examiner's  report. 

That  former  Comptrollers  did  not  pursue  Mr.  Murray's 
policy,  except  in  special  cases,  was  due  to  the  inadequate  fee  sys- 
tem of  compensation.  They  did  not  feel  justified  in  exacting  of 
an  examiner  several  days'  work  for  one  day's  compensation,  and 
did  not  feel  authorized  to  increase  that  allowance  by  an  arbitrary 
and  unlawful  assessment  upon  the  bank.  But  they  recognized  the 
weakness  of  the  system  in  this  respect  and  recommended  to  Con- 
gress time  and  again  a  change  from  a  fee  to  a  salary  or  per  diem 
and  expense  allowance.  They  did  not  assume  the  right  to  change 
the  law  by  administrative  regulation.  Mr.  Murray,  however,  over- 
came this  obstacle  by  disregarding  the  law  and  unlawfully  assess- 
ing a  per  diem  for  the  number  of  days  devoted  to  a  special  exam- 
ination where  the  statute  fixed  the  fee. 

Where  an  examiner  was  restricted  to  the  statutory  fee  for  a 
regular  examination  and  was  required  to  remain  at  the  bank  until 
all  unsatisfactory  conditions  were  corrected,  his  compensation 
in  many  such  cases  barely  exceeded  his  expenses. 

As  a  result  of  this  policy  some  of  the  very  best  examiners  in 
the  service,  after  two  or  three  months'  work  under  the  conditions 
stated,  tendered  their  resignations,  giving  as  a  reason  therefor 
that  their  net  income  during  that  time,  over  and  above  actual 
expenses,  averaged  only  two  dollars  a  day.  Other  examiners  had 
the  same  experience,  and  within  a  period  of  eighteen  or  twenty 
months,  thirty  examiners  voluntarily  resigned  and  left  the  service, 


ROMANCE  AND  TRAGEDY  OF  BANKING  393 

either  because  of  the  inadequacy  of  the  compensation  or  the  in- 
tolerable conditions  under  which  they  were  required  to  work. 

Mr.  Murray's  policy  of  requiring  examiners  to  devote  as  much 
time  to  an  examination  as  was  necessary  to  a  thorough  under- 
standing of  the  condition  of  the  bank,  and  to  have  all  objection- 
able matters  corrected  before  leaving  the  institution,  was,  without 
doubt,  the  correct  theory  of  examinations.  But  such  thorough- 
ness could  not  be  secured  under  the  fee  system  of  compensation. 
An  examiner  should  be  adequately  compensated  for  the  time  ac- 
tually and  necessarily  employed  in  making  an  examination,  and 
this  could  be  accomplished  only  under  a  salary  or  per  diem  and 
expense  allowance. 

Is  it  to  be  wondered,  therefore,  that  examinations  were  more 
effective  under  Mr.  Murray's  administration  than  under  those  of 
his  predecessors?  In  making  the  contrast,  however,  the  unlawful 
methods  employed  to  accomplish  results  must  be  taken  into  con- 
sideration. 

In  connection  with  the  organization  of  new  banks  the  law  pro- 
vided that  any  number  of  natural  persons,  not  less  than  five, 
might  form  a  national  banking  association,  and  after  they  had 
executed  all  the  necessary  papers  and  complied  with  the  provi- 
sions of  law  relating  to  organization,  the  Comptroller  should 
issue  his  certicate  of  authority  to  the  bank  to  commence  business. 
But  if  he  had  reason  to  suppose  that  the  shareholders  had  formed 
the  association  for  any  other  purpose  than  the  legitimate  objects 
contemplated  by  the  National  Bank  Act,  he  was  authorized  to 
withhold  his  certificate. 

No  Comptroller  of  the  Currency  before  Mr.  Murray  ever 
assumed  the  right  to  determine  the  question  of  the  business  needs 
for  a  new  bank,  or  an  additional  association,  in  any  city,  town  or 
place.  That  question  was  left  to  the  judgment  of  the  organizers 
and  the  subscribers  for  the  stock  in  the  proposed  institution.  If 
they  chose  to  risk  their  capital  in  a  doubtful  venture  of  this  kind, 
it  was  held  by  the  Comptroller  that  banking  was  free  and  that 
he  had  no  authority  to  deny  them  a  charter.  If  the  organizers  of 
the  bank  were  ascertained  to  be  men  of  reputable  character  and 
standing  in  their  community,  and  were  organizing  the  bank  for 
the  legitimate  purposes  contemplated  by  the  banking  laws,  it  was 


394  ROMANCE  AND  TRAGEDY  OP  BANKING 

held  that  they  had  the  same  right  to  engage  in  the  business  of 
banking  as  those  already  in  the  business ;  that  banking  was  free 
to  any  five  reputable  citizens  who  desired  to  form  an  association, 
and  that  when  all  the  provisions  of  law  had  been  complied  with, 
the  Comptroller  was  required  to  issue  his  certificate  of  authority. 

But  Mr.  Murray  assumed  the  right  to  determine  whether  or 
not  there  was  any  business  demand  for  the  proposed  bank  and 
exercised  the  discretion  of  issuing  or  withholding  his  certificate 
of  authority  accordingly. 

Nowhere  in  the  national  banking  laws  could  authority  be 
found,  expressed  or  implied,  vesting  the  Comptroller  with  such 
discretionary  power,  and  in  the  absence  of  any  provision  of  this 
nature,  Comptrollers  from  McCulloch  to  Ridgely  held  that  they 
had  no  discretion  in  the  matter.  Banks  with  a  capital  stock  of 
fifty  thousand  dollars  and  less  required  the  approval  of  the  Secre- 
tary of  the  Treasury  to  their  organization.  This  exception  would 
seem  to  confer  upon  the  Secretary  the  discretion  of  determining 
whether  or  not  banks  of  this  class  should  be  authorized. 

While  such  discretionary  power,  if  judiciously  and  impartial- 
ly exercised,  would  prevent  the  organization  of  banks  for  which 
there  is  no  legitimate  field,  at  the  same  time  it  is  a  power  that  is 
open  to  serious  abuse  and  therefore  a  dangerous  discretion  to 
vest  in  any  administrative  official.  In  the  hands  of  an  unscrupu- 
lous official  it  could  be  wielded  in  the  interests  of  existing  associa- 
tions ambitious  to  monopolize  the  banking  business  of  their  re- 
spective communities.  If  too  many  banks  were  organized  in  a 
place,  the  fittest  would  survive.  In  some  instances  this  condition 
had  existed,  but  the  latest  organized  institution  sometimes  ab- 
sorbed the  business  of  the  older  one,  because  of  the  greater  confi- 
dence of  the  community  in  the  ability  and  integrity  of  the  manage- 
ment. Following  the  example  of  Mr.  Murray  his  successor  in 
office  pursued  the  same  policy. 

Another  regulation  made  by  Mr.  Murray  in  connection  with 
the  organization  of  banks  was  the  requirement  that  the  president 
and  a  majority  of  the  directors  of  a  new  institution  should  reside 
in  the  place  in  which  the  bank  was  to  be  located. 

The  National  Bank  Act  required  at  least  three-fourths  of  the 
directors  of  a  bank  to  have  resided  in  the  State  in  which  the  bank 


KOMANCE  AND  TRAGEDY  OF  BANKING  395 

was  located  for  at  least  one  year  preceding  their  election,  and  to 
continue  such  residence  in  the  same  proportion  during  the  ex- 
istence of  the  association.  But  there  was  nothing  in  the  law  re- 
quiring the  president  or  a  majority  of  the  board  of  directors  to 
reside  at  the  place  of  location  of  the  bank. 

The  purpose  of  this  administrative  regulation  was  to  insure 
the  regular  attendance  of  the  president  and  a  majority  of  the 
directors  to  the  business  of  the  bank,  and  Mr.  Murray  thought 
that  this  could  better  be  accomplished  by  having  them  reside  in 
the  same  place  than  to  have  a  non-resident  president  and  non- 
resident directors. 

In  this  same  connection  Mr.  Murray  required  the  shareholders 
of  a  new  bank  to  be  financially  worth  double  the  amount  of  their 
stock  subscriptions.  He  contended  that  as  the  law  held  stock- 
holders liable  in  their  individual  capacity  to  the  extent  of  the 
amount  of  their  stock  investments,  the  statute  contemplated  that 
they  should  be  worth  double  the  amount  of  their  subscriptions, 
and  he  prescribed  a  new  form  of  organization  certificate  requir- 
ing the  financial  worth  of  each  subscriber  to  the  original  capital 
to  be  stated. 

There  was  no  authority  of  law  to  support  such  a  regulation. 
Any  person  had  a  right  to  subscribe  for  stock  in  a  national  bank 
who  could  pay  the  price  of  his  subscription,  even  though  he  did 
not  have  another  dollar  to  his  name.  The  law  did  not  require, 
nor  contemplate,  that  a  subscriber  for  stock  should  demonstrate 
his  financial  ability  to  respond  to  an  assessment  as  a  condition 
precedent  to  his  right  to  subscribe.  The  statute  provided  another 
means  of  meeting  this  contingency.  If  the  capital  of  a  bank  be- 
came impaired  by  losses  or  otherwise,  and  an  assessment  was 
ordered  to  make  good  the  deficiency,  the  stock  of  any  shareholder 
who  was  unable  or  refused  to  pay  his  pro  rata  share  of  the  as- 
sessment was  required  to  be  sold  at  public  auction,  after  due 
notice,  for  not  less  than  the  amount  of  the  assessment  due  thereon. 

The  foregoing  comprises  some  of  the  principal  measures  of 
reform  introduced  and  enforced  by  Mr.  Murray  during  his  term 
as  Comptroller,  by  which  his  administration  was  distinguished 
from  that  of  any  of  his  predecessors.  Original  as  they  were 
novel,  arbitrary  as  they  were  unlawful,  resting  solely  upon  the 


396  ROMANCE  AND  TRAGEDY  OF  BANKING 

fiat  of  the  Comptroller,  these  measures  were  successful  in  part  to 
the  extent  only  that  the  existing  banks  to  which  they  were  ap- 
plied tacitly  submitted  to  his  official  decree. 

The  banks  that  submitted  without  protest  were  usually  such 
as  feared  the  effect  upon  the  institution  of  the  exposure  that 
might  result  from  resistance  to  the  Comptroller's  requirements, 
and  concluded  that  discretion  was  the  better  part  of  valor.  Those 
that  entered  a  vigorous  protest  were  invariably  excepted  from  the 
operation  of  the  unlawful  regulation,  and  those  that  were  in 
nowise  affected  were  indifferent  to  the  requirements. 

Most  of  the  strenuous  and  experimental  measures  adopted  by 
Mr.  Murray  were  put  in  force  early  in  his  administration.  Many 
of  them  after  being  tried  were  materially  modified  or  abandoned 
altogether,  either  because  of  their  illegality  or  impracticability  of 
enforcement. 

The  most  satisfactory  test  of  the  real  merit  and  success  of 
any  administrative  reform  is  the  actual  results  attained  from  its 
practical  operation,  in  comparison  with  the  practice  or  rule  of 
conduct  which  the  reformatory  measure  displaced.  All  changes 
in  administrative  practices  are  not  necessarily  reforms  or  im- 
provements on  old  methods.  Unfortunately,  however,  the  same 
degree  of  activity  is  never  displayed  in  giving  publicity  to  the 
actual  results  of  experimental  reforms  as  is  used  by  the  reformer 
in  advertising  his  measures  in  the  first  place.  So  that  the  public 
is  never  in  possession  of  the  facts  essential  to  the  formation  of 
intelligent  and  impartial  judgments  as  to  the  true  merits  of 
changes  which  administrative  officials  advertise  as  reforms, 
whether  such  changes  relate  to  methods  of  management  or  econ- 
omy in  expenditures  of  public  moneys.  The  credit  side  of  the 
account  is  generally  freely  displayed  or  advertised,  but  the  debit 
side  is  never  disclosed,  especially  if  it  does  not  make  a  favorable 
showing. 

Such  was  the  case  with  many  of  Mr.  Murray's  experiments. 
His  administration  of  the  Currency  Bureau  was  distinguished 
from  that  of  any  of  his  predecessors  from  McCullough  to  Ridgely 
in  one  marked  respect,  and  that  was  his  assumption  of  supervis- 
ory powers  over  the  banks  not  conferred  upon  the  Comptroller 
by  law.  Other  Comptrollers  recognized  the  inadequacies  of  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  397 

statutes  in  many  respects  and  suggested  to  Congress  the  legis- 
lative remedies,  without  which  they  did  not  feel  warranted  in 
adopting  methods  of  administration  contrary  to  law.  Mr.  Mur- 
ray proceeded  without  such  authority,  and  by  this  rule  of  meas- 
urement alone  can  his  administration  be  justly  contrasted  or  com- 
pared with  those  of  his  predecessors  in  the  results  accomplished. 

If  it  is  to  be  conceded  that  an  administrative  official  is  justi- 
fied in  ignoring  the  plain  provisions  of  the  statutes  enacted  for 
his  guidance  and  for  the  protection  of  the  interests  confided  to 
his  supervision,  in  order  to  successfully  carry  out  his  measures 
of  reform  or  to  gratify  an  ambition  to  distinguish  his  adminis- 
tration from  those  of  his  predecessors  in  the  results  accomplished, 
then  Mr.  Murray's  administration  of  the  Currency  Bureau  may 
be  ranked  with  the  most  successful  in  its  history.  But  in  com- 
paring it  with  previous  administrations  the  legality  or  illegality 
of  the  measures  and  methods  employed  to  secure  results  must 
have  full  consideration. 

Human  nature  does  not  change  much  as  time  rolls  on.  Men 
are  influenced  by  the  same  motives  in  the  present  day  and  gen- 
eration as  they  were  in  ages  gone  by. 

The    world    is    still    deceiv'd    with    ornament. 
In  law,  what  plea  so  tainted  and  corrupt, 
But,  being  season'd  with  a  gracious  voice, 
Obscures  the  show  of  evil?     In   religion, 
What   damned   error,   but   some   sober   brow 
Will  bless  it,  and  approve  it  with  a  text? 
Thus  ornament  is   but  the   gilded   shore 
To  a  most  dangerous  sea. 

Failures  During  Mr.  Murray's  Term 

Although  only  forty-three  banks  were  placed  in  the  hands  of 
receivers  during  Mr.  Murray's  administration,  the  number  of 
actual  failures  during  that  period  was  much  greater. 

Mr.  Murray  was  decidedly  averse  to  appointing  receivers  for 
failed  banks  and  he  made  such  appointments  only  when  a  bank 
was  so  hopelessly  insolvent  that  a  receiver  was  unavoidable,  con- 
sequently a  number  of  banks  that  were  insolvent  at  the  time  they 


398          ROMANCE  AND  TRAGEDY  OF  BANKING 

were  closed  were  allowed  to  be  liquidated  by  other  methods  than 
a  receivership,  contrary  to  law,  and  appear  in  the  reports  of  the 
Comptroller  as  voluntary  liquidations. 

The  largest  of  the  banks  that  were  placed  in  the  hands  of 
receivers  by  Mr.  Murray  were  the  Allegheny  National  and  the 
Cosmopolitan  National  Banks  of  Pittsburgh,  Pa.,  each  with  a 
capital  stock  of  five  hundred  thousand  dollars  and  gross  liabili- 
ties of  $3,854,263  and  $1,519,585,  respectively,  and  the  Union 
National  Bank  of  Columbus,  Ohio,  with  capital  stock  of  $750,000 
and  liabilities  of  $3,489,674.  The  two  former  were  closed  May 
18,  1908,  and  September  5,  1908,  respectively,  and  the  latter 
December  7,  1911. 

The  Allegheny  National  Bank  was  wrecked  by  its  cashier,  who 
was  tried  and  sentenced  to  a  term  in  the  penitentiary  for  criminal 
violations  of  law.  The  Cosmopolitan  failed  because  of  losses  sus- 
tained on  loans  made  largely  in  excess  of  the  legal  limit,  and  the 
Union  because  of  injudicious  banking. 

The  most  sensational  and  disastrous  failure  that  occurred 
during  Mr.  Murray's  term  was  the  First  National  Bank  of  Min- 
eral Point,  Wis.,  which  was  placed  in  the  hands  of  a  receiver 
October  12,  1909.  The  capital  stock  of  this  bank  was  $100,000, 
the  surplus  and  undivided  profits  $31,723,  and  the  total  liabilities 
$668,000.  The  bank  was  dominated  by  Phil  Allen,  Jr.,  a  promi- 
nent citizen  of  Mineral  Point. 

During  the  progress  of  a  special  examination  of  the  bank  the 
examiner's  suspicion  was  aroused  by  erasures  and  alterations  in 
the  certificate  of  deposit  register,  which  were  plainly  evident. 
Thirteen  hundred  dollars  was  made  to  read  $300  by  removing 
the  figure  one,  and  $6100  was  changed  to  read  $1100,  by  altering 
the  figure  six. 

Phil  Allen,  the  vice-president  of  the  bank,  was  questioned  by 
the  examiner  in  regard  to  these  alterations  and  the  consequent 
discrepancies  between  the  certificate  register  and  the  general 
ledger  balance.  At  first  he  denied  any  knowledge  of  the  trans- 
actions, but  finally  admitted  that  he  had  altered  the  record,  giv- 
ing as  a  reason  for  doing  so  that  he  was  worried  over  a  loan  that 
he  had  made  in  excess  of  the  limit  and  had  temporarily  borrowed 
from  the  owners  of  these  certificates,  without  their  knowledge,  a 


ROMANCE  AND  TRAGEDY  OF  BANKING  399 

sum  sufficient  to  enable  him  to  conceal  the  excessive  loan  from 
the  examiner.  The  examiner  then  took  Allen  in  the  back  room 
of  the  bank  for  a  conference,  as  he  felt  certain  that  the  note  file 
had  been  tampered  with,  the  notes  having  been  handled  exclusively 
by  Allen.  They  went  over  the  loans  and  discounts  together  and 
Allen  picked  out  notes  aggregating  $90,000  which  he  admitted 
were  forgeries.  The  examiner  then  called  the  directors  together 
and  informed  them  of  the  condition  of  affairs.  They  appeared 
to  have  very  little  knowledge  of  the  loans,  but  were  personally 
acquainted  with  most  of  the  makers  of  the  notes. 

The  examiner  procured  a  typewritten  confession  from  Allen 
in  which  he  admitted  numerous  forgeries,  falsification  of  the  books 
and  reports,  embezzlement,  abstraction  and  the  whole  category 
of  the  crimes  covered  by  the  penal  statute  of  the  Bank  Act. 

His  peculations  were  carried  on  and  concealed  in  various 
ways.  In  addition  to  the  manipulation  of  the  certificate  of  de- 
posit register  and  forged  notes  placed  in  the  loans  and  discounts, 
he  had  convenient  for  use  a  supply  of  certificates  of  deposit, 
printed  in  blank,  with  duplicate  numbers.  He  sold  notes  to  cus- 
tomers of  the  bank  who  had  money  on  deposit  to  their  credit. 
In  a  great  many  instances  these  notes  were  fictitious,  and  in  some 
cases  were  the  property  of  the  bank.  In  the  bank  vault  there  was 
a  special  file  containing  about  five  hundred  envelopes,  in  which 
there  were  notes,  securities,  life  insurance  policies  and  other  valu- 
ables belonging  to  customers  which  had  been  placed  there  by  them 
for  safekeeping.  Many  of  these  envelopes  had  been  pilfered  of 
their  contents,  and  in  some  cases  good  notes  had  been  taken  out 
and  forged  notes  substituted.  How  much  Allen  stole  by  this 
method  probably  never  will  be  known,  as  the  bank  was  not  liable 
for  the  property  left  in  these  envelopes. 

The  bank  was  absolutely  looted  by  Allen  and  some  of  his 
associates  who  had  been  in  control  of  affairs  at  Mineral  Point 
financially  and  politically  for  years.  They  used  the  bank  to 
further  their  mining  schemes  and  speculations,  some  of  which 
were  financed  from  the  beginning  of  their  development  by  money 
borrowed  from  the  bank. 

The  failure  of  this  bank  caused  a  great  amount  of  suffering 
and  hardship  throughout  the  section  in  which  it  was  located. 


400          ROMANCE  AND  TRAGEDY  OF  BANKING 

Allen's  peculations  began  as  far  back  as  1893,  through  the  failure 
of  a  local  industrial  venture  in  which  he  was  heavily  interested, 
and  increased  year  by  year  until  the  collapse  of  the  bank  in 
October,  1909.  He  was  a  genius  in  the  art  of  fraud  and  decep- 
tion. He  carried  on  his  stealings  for  many  years  and  successfully 
concealed  them  from  various  bank  examiners,  the  board  of  direc- 
tors and  those  who  were  associated  with  him  daily  in  the  bank. 
Although  a  clever  forger,  a  close  inspection  of  his  handwriting 
readily  detected  the  forgery.  The  system  of  bookkeeping  em- 
ployed in  the  bank  was  so  complicated  that  it  was  difficult  to  trace 
entries  through  the  books.  The  system  of  accounting  and  the 
manner  in  which  the  business  of  the  bank  was  conducted  were  no 
doubt  designed  by  Allen  to  enable  him  to  carry  on  and  conceal 
his  peculations  and  fraud.  No  deposit  slips  were  used.  Many 
of  the  depositors  did  not  use  checks,  being  furnished  with  a  pass- 
book in  which  deposits  and  withdrawals  were  entered,  the  bank 
taking  no  receipt  for  such  withdrawals. 

It  was  very  difficult  for  the  examiner,  after  taking  possession 
of  the  bank,  to  trace  Allen's  falsifications  and  peculations.  Allen 
would  volunteer  no  information  and  render  no  assistance.  He 
would  admit  a  forgery,  defalcation,  or  falsification  of  the  books 
only  when  confronted  with  absolute  proof,  and  in  the  most  inno- 
cent and  nonchalant  manner  say  that  he  was  very  sorry  he  had 
not  remembered  the  transaction  and  spared  the  examiner  the  time 
and  trouble  of  tracing  it  out. 

He  had  a  very  ingenious  system  of  numbering  his  notes 
whereby  he  could  with  certainty  determine  whether  the  signature 
to  a  note  was  genuine  or  forged.  He  was  the  administrator  for  a 
number  of  estates  and  it  was  understood  that  he  robbed  these 
in  the  same  way  that  he  did  the  bank.  His  total  stealings  from 
the  bank  were  reported  to  amount  to  over  $400,000. 

So  great  was  the  confidence  in  him  of  many  of  the  old  cus- 
tomers of  the  bank  and  his  church-going  friends,  that  some  of 
them  would  not  believe  he  was  guilty  of  the  crimes  charged  against 
him  until  he  admitted  his  guilt,  and  then  one  of  the  old  lady 
members  of  his  church  and  one  of  his  victims  remarked,  "Well, 
Phil  may  be  guilty,  but  my !  he  could  say  a  nice  prayer." 


ROMANCE  AND  TRAGEDY  OF  BANKING  401 

Allen  was  indicted,  and  when  arraigned  pleaded  guilty  and 
was  sentenced  to  a  term  of  ten  years  in  the  penitentiary. 

Shortly  following  the  closing  of  the  bank,  Frank  E.  Hans- 
corn,  the  cashier,  committed  suicide,  and  his  mother-in-law  died 
suddenly  the  same  night  from  shock  on  learning  of  his  death. 
Hanscom  was  related  to  Allen  by  marriage.  At  first  it  was  not 
thought  that  he  was  implicated  with  Allen  in  any  of  his  fraudu- 
lent transactions,  as  no  evidence  of  collusion  could  be  found.  But 
investigation  following  the  failure  of  the  bank  disclosed  that  all 
the  false  entries  and  alterations  in  the  books  were  made  by  him, 
presumably  at  Allen's  instigation,  and  when  he  found  that  dis- 
covery was  inevitable,  he  left  the  bank  and  killed  himself. 

It  was  natural  that  the  indignant  depositors  in  this  bank  who 
suffered  heavily  through  the  rascality  of  Allen  and  the  negligence 
of  the  board  of  directors,  should  vent  their  indignation  upon 
somebody,  and,  as  usual,  the  bank  examiner  was  held  to  be  prin- 
cipally responsible. 

While  a  bank  examiner  is  required  to  satisfy  himself  as  to  the 
value  of  the  paper  which  he  finds  in  a  bank,  it  is  neither  the  prac- 
tice nor  the  duty  of  an  examiner  to  verify  the  signatures  to  the 
notes.  He  assumes,  as  he  has  a  right  to  assume,  that  the  names 
signed  to  the  paper  are  the  genuine  signatures  of  the  purported 
makers,  unless  his  suspicions  to  the  contrary  are  aroused  at  the 
time  of  examination.  It  is  the  duty  of  the  officers  and  of  the 
bank  directors  to  know  that  the  notes  they  accept  for  loans  are 
genuine  and  worth  their  face  value,  and  this  responsibility  they 
cannot  evade  or  shift  upon  the  examiner. 

When  the  directors  are  obliged  to  purchase  outside  com- 
mercial paper  through  correspondent  banks  in  order  to  find  em- 
ployment for  surplus  funds,  and  have  to  rely  upon  correspond- 
ents' representations  as  to  the  genuineness  and  worth  of  such 
paper,  they  may  be  in  a  measure  excusable  if  some  spurious  or 
worthless  notes  occasionally  find  their  way  into  the  bank,  but 
they  are  inexcusably  negligent  when  they  accept  and  permit  to 
be  carried  as  good  assets  forged,  fictitious  and  worthless  local 
paper  when  a  casual  examination  or  inquiry  in  regard  to  such 
paper  would  disclose  its  worthless  character. 


402  ROMANCE  AND  TRAGEDY  OF  BANKING 

Change  of  Location  of  Small  Suburban   Bank 

A  question  was  raised  during  Mr.  Murray's  administration 
as  to  the  right,  of  a  national  bank,  organized  with  a  small  capital 
to  do  business  in  a  suburb  or  place  adjacent  to  a  large  city,  to 
change  its  location  to  another  point  within  that  city  after  the 
corporate  limits  of  the  city  had  been  extended  to  include  the 
suburb,  without  first  increasing  the  capital  of  the  bank  to  the 
amount  required  by  law  for  a  bank  in  a  city  with  a  population  of 
six  thousand  or  more. 

The  law  required  the  organization  certificate  of  a  bank  to 
state  specifically  the  place  where  its  business  was  to  be  conducted, 
and  the  bank  was  chartered  to  do  business  in  that  place  and  no- 
where else.  The  law  authorized  a  bank  to  change  its  location  by 
a  vote  of  its  stockholders  owning  two-thirds  of  the  stock  and  with 
the  approval  of  the  Comptroller,  to  any  other  place  within  the 
same  State  not  more  than  thirty  miles  distant,  after  complying 
with  the  requirements  of  law  in  regard  to  the  minimum  amount 
of  capital. 

While  a  bank  had  an  unquestioned  right  to  change  its  domi- 
cile to  any  other  point  within  the  city  or  location  in  which  it  was 
organized  to  do  business,  it  was  contended  by  the  Comptroller's 
office  that  when  the  corporate  limits  of  a  city  were  extended  to 
cover  an  adjacent  place  or  suburb,  a  bank  with  a  small  capital 
organized  to  do  business  in  that  place  had  no  right  to  change  its 
location  to  a  point  within  the  city  proper  where  it  could  not 
have  been  authorized  to  do  business  in  the  first  place  without  a 
larger  capital. 

The  First  National  Bank  of  Capitol  Hill,  Oklahoma,  was 
chartered  November  17,  1909,  with  a  capital  of  twenty-five 
thousand  dollars  to  do  business  in  the  village  of  Capitol  Hill, 
adjacent  to  Oklahoma  City.  Shortly  afterward  the  corporate 
limits  of  Oklahoma  City  were  extended  to  cover  Capitol  Hill, 
and  the  bank  subsequently  removed  its  location  to  the  business 
center  of  the  city  without  first  increasing  its  capital  from  twenty- 
five  to  two  hundred  thousand  dollars,  the  minimum  capital  re- 
quired by  law  for  a  bank  in  a  city  with  a  population  of  fifty 
thousand  or  more. 


ROMANCE  AND  TRAGEDY  OF  BANKING  403 

The  Comptroller  referred  the  case  to  the  Solicitor  of  the 
Treasury  with  a  request  to  instruct  the  United  States  Attorney 
for  Oklahoma  to  commence  an  action  against  the  bank  for  for- 
feiture of  charter. 

After  a  hearing  in  the  office  of  the  Solicitor  at  Washington, 
by  agreement  with  counsel  for  the  bank,  a  suit  was  instituted  in 
the  name  of  the  Comptroller  in  the  United  States  District  Court 
for  the  Second  District  of  Oklahoma  for  annulment  of  the  bank's 
charter. 

The  defendant  demurred  to  the  petition,  but  the  Court  over- 
ruled the  demurrer  and  held  that  the  petition  stated  good  ground 
for  cause  of  action  for  forfeiture  of  charter. 

The  case  was  then  appealed  to  the  United  States  Circuit 
Court  of  Appeals,  which  Court  held  that  the  alteration  of  the 
boundaries  of  the  City  of  Oklahoma  did  not  entitle  the  bank  to 
remove  its  place  of  business  to  a  point  within  that  city  without 
first  increasing  its  capital  as  required  by  the  Comptroller,  and 
having  so  removed  without  compliance  with  those  conditions  the 
Comptroller  was  entitled  to  maintain  a  suit  for  the  forfeiture  of 
the  bank's  charter. 

In  the  meantime,  in  anticipation  of  this  decision,  the  bank,  by 
a  vote  of  its  stockholders,  was  placed  in  voluntary  liquidation  on 
July  22,  1913. 

A  Chicken  Bank 

In  a  small  country  town  located  a  short  distance  from  a  rail- 
road there  was  a  State  bank  in  operation  which  had  been  reason- 
ably successful  in  business  and  apparently  supplied  the  town 
with  all  the  banking  facilities  needed. 

In  the  same  town  there  lived  a  retired  professional  man  of 
prominence  and  influence  in  the  community,  who  also  had  been 
successful  in  business.  His  next-door  neighbor  was  a  young  man 
who  had  a  fondness  for  raising  chickens,  of  which  he  had  quite  a 
number.  The  party-line  fence  which  separated  their  properties 
was  not  in  very  good  repair  and  afforded  the  chickens  an  oppor- 
tunity to  trespass  upon  his  neighbor's  premises,  causing  more  or 
less  friction  and  unpleasantness  between  them.  On  one  occasion 
the  two  neighbors  met  on  the  street  and  the  one  who  was  annoyed 


404 

by  the  chickens  complained  to  the  other  and  admonished  him  in 
very  emphatic  language  that  he  must  keep  his  chickens  at  home. 
Some  warm  words  passed  between  them,  with  the  result  that  their 
neighborly  relations  were  thereafter  very  much  estranged. 

Shortly  subsequent  to  this  occurrence  the  owner  of  the 
chickens  secured  employment  in  the  little  bank  in  the  town  as  a 
clerk,  and  one  day  his  elderly  neighbor  dropped  in  the  bank  to 
transact  some  business,  and,  seeing  the  young  man  at  work  there, 
went  immediately  to  the  cashier  and  demanded  his  dismissal,  say- 
ing that  he  would  withdraw  his  account  if  his  employment  was 
continued. 

The  cashier  promptly  and  properly  refused  to  comply  with 
this  demand,  consequently  the  account  of  the  unreasonable  cus- 
tomer was  withdrawn.  There  was  no  other  bank  in  the  town, 
and  none  nearer  than  seven  miles  away,  which  made  it  quite  incon- 
venient for  him  to  transact  his  banking  business,  so  he  determined 
to  organize  a  new  bank  and  operate  it  in  opposition  to  and  in 
competition  with  the  State  bank. 

When  the  officers  of  the  State  bank  learned  of  his  purpose 
the  directors  immediately  made  application  to  the  Comptroller 
for  authority  to  convert  their  institution  into  a  national  asso- 
ciation. 

Both  banks  applied  for  the  title  of  First  National,  but  as  the 
application  of  the  new  bank  was  the  first  received  at  the  Comp- 
troller's office,  under  the  rule  it  was  entitled  to  and  was  allowed 
the  title. 

Within  a  year  after  this  bank  opened  for  business  the  cashier 
defaulted  and  the  organizer  sustained  an  individual  loss  in  conse- 
quence, far  greater  than  any  he  had  incurred  as  a  result  of  the 
depredations  and  trespassing  of  his  neighbor's  chickens. 

This  bank  was  always  referred  to  by  the  employees  of  the 
Comptroller's  office  as  the  "chicken  bank." 

The  law  conferred  upon  the  Comptroller  of  the  Currency 
authority  to  refuse  a  charter  to  a  national  bank  whenever  he  had 
reason  to  suppose  that  the  shareholders  had  organized  the  bank 
for  any  other  than  the  legitimate  objects  contemplated  by  the 
national  banking  laws. 


ROMANCE  AND  TRAGEDY  OF  BANKING  405 

While  the  organization  of  this  bank  was  known  to  be  purely 
a  matter  of  spite  growing  out  of  a  disagreement  between  two 
neighbors  over  a  few  marauding  chickens,  the  Comptroller  did 
not  consider  that  this  fact  afforded  sufficient  warrant  for  his 
denial  of  a  charter,  and,  therefore,  he  issued  his  certificate  of 
authority. 

Banks  organized  under  such  conditions  are  not,  as  a  rule, 
successful  or  prosperous  institutions,  and  this  bank  proved  to 
be  no  exception  to  the  rule,  as  the  town  was  already  amply  sup- 
plied with  banking  facilities  by  the  successful  institution  already 
in  operation  there,  which  apparently  possessed  the  confidence  and 
had  the  support  of  the  community. 


CHAPTER  XV 

Interim 

THE  term  of  Lawrence  O.  Murray  expired  by  statutory  limi- 
tation April  27,  1913,  having  extended  fourteen  months 
into  the  administration  of  President  Wilson.  The  office 
remained  vacant  from  that  date  until  February  2,  1914,  when 
John  Skelton  Williams  qualified  as  Comptroller  and  assumed 
charge  of  the  Bureau. 

During  the  vacancy,  which  covered  a  period  of  ten  months, 
the  Bureau  was  in  charge  of  the  writer  as  Acting  Comptroller. 

During  this  period,  in  consequence  of  a  change  in  the  political 
complexion  of  the  Federal  administration  at  Washington,  a  great 
deal  of  constructive  work  was  necessary.  Congress  had  been 
convened  in  extra  session  and  bills  were  under  consideration  pro- 
posing material  amendments  to  the  banking  and  currency  laws, 
which  required  the  preparation  of  a  great  amount  of  statistical 
data  for  the  information  of  the  Secretary  of  the  Treasury  and 
the  Banking  and  Financial  Committees  of  the  Senate  and  House 
of  Representatives.  Aside  from  this  consideration  and  passage 
of  the  Federal  Reserve  Act,  the  principal  events  of  the  period 
were  the  failure  of  the  First-Second  National  Bank  of  Pittsburgh, 
Pa.,  and  the  suspension  of  the  United  States  Trust  Company, 
of  Washington,  D.  C. 

The  First  National  Bank  of  Pittsburgh  was  an  old  institu- 
tion, having  been  chartered  August  5,  1863,  with  an  authorized 
capital  stock  of  $400,000. 

The  bank  was  last  examined  before  merger  with  the  Second 
National  Bank  of  Pittsburgh  in  September,  1912.  The  examiner 
then  reported  the  capital  to  be  impaired  thirty  per  cent.  The 
board  of  directors  were  notified  of  the  impairment  and  were 
advised  that  if  the  deficiency  was  not  made  good  without  delay 
they  would  be  required  to  call  a  meeting  of  the  shareholders  for 
the  purpose  of  assessing  the  stock  or  placing  the  bank  in  volun- 
tary liquidation.  The  directors  were  financially  unable  to  restore 

407 


408          ROMANCE  AND  TRAGEDY  OF  BANKING 

the  impaired  capital  and  were  fearful  that  any  attempt  to  make 
good  the  deficiency  by  assessment  of  the  stockholders  would  pre- 
cipitate a  crisis  which  would  probably  close  the  bank.  Negotia- 
tions were  then  renewed  with  the  Second  National  Bank  of  Pitts- 
burgh, which  had  been  started  sometime  previously  and  aban- 
doned, for  the  consolidation  of  the  two  banks.  These  negotia- 
tions were  conducted  by  Oscar  L.  Telling,  the  irresponsible  presi- 
dent of  the  First  National  Bank,  in  conjunction  with  the  Messrs. 
Kuhn,  who  were  heavily  interested  in  both  banks. 

The  scheme  to  merge  the  two  banks  was  cunningly  devised 
and  successfully  forced  through,  as  subsequently  disclosed, 
against  the  earnest  protests  of  certain  substantial  stockholders 
of  the  Second  National  Bank,  who,  however,  failed  to  make  their 
protests  known  to  the  Comptroller's  office  until  after  the  merger. 

The  Second  National  Bank  was  also  an  old  institution,  hav- 
ing been  organized  December  11,  1863,  with  an  authorized  capi- 
tal of  $300,000. 

While  negotiations  for  the  merger  of  the  two  banks  were 
pending,  several  conferences  were  held  by  the  Messrs.  Kuhn, 
Telling  and  the  national  bank  examiner  with  Comptroller  Murray 
at  the  office  of  the  latter  in  Washington.  What  understanding 
was  reached  at  these  conferences  the  records  of  the  Comptroller's 
office  do  not  show  and  no  official  connected  with  the  office  was 
present  at  the  conferences  other  than  the  Comptroller  and  the 
bank  examiner. 

The  First  National  Bank  was  voted  into  voluntary  liquidation 
by  its  stockholders  April  19,  1913. 

The  Second  National  Bank  increased  its  capital  stock  to 
$1,600,000  on  April  21,  1913,  purchased  the  assets  of  the  First 
National,  assumed  its  liabilities  and  merged  its  business  with  the 
latter  bank  under  the  title  of  First-Second  National,  with  a  com- 
bined capital  of  $3,400,000. 

Comptroller  Murray's  term  expired  April  27,  1913,  and  the 
duties  of  the  Comptroller  then  devolved  upon  the  Acting  Comp- 
troller. 

The  First-Second  National  Bank  was  then  past  due  for  exam- 
ination in  regular  order,  and  as  the  records  of  the  Comptroller's 
office  did  not  show  the  condition  of  the  consolidated  bank  or  what 


ROMANCE  AND  TRAGEDY  OF  BANKING  409 

had  been  done  toward  the  elimination  of  the  objectionable  assets 
on  which  the  losses  were  estimated  which  impaired  the  capital  of 
the  first  National,  two  of  the  most  experienced  examiners  in  the 
service  were  instructed,  under  date  of  May  21,  1913,  to  make  a 
thorough  examination  of  the  bank,  but  owing  to  the  fact  that  one 
of  them  was  then  engaged  upon  some  special  work,  the  examina- 
tion was  not  commenced  until  the  first  week  in  June  following. 

As  the  examination  progressed,  a  condition  was  disclosed 
which  the  examiners  regarded  as  so  serious  that  a  conference  with 
the  Acting  Comptroller  in  Washington  was  requested. 

John  Skelton  Williams  was  then  Assistant  Secretary  of  the 
Treasury  and  was  slated  by  the  Secretary  of  the  Treasury  for 
the  vacancy  in  the  office  of  Comptroller  of  the  Currency. 

The  law  provided  that  the  Comptroller  of  the  Currency 
should  be  appointed  by  the  President  upon  the  recommendation 
of  the  Secretary  of  the  Treasury,  and  confirmed  by  the  Senate 
for  a  term  of  five  years,  and  should  discharge  the  duties  of  his 
office  under  the  general  direction  of  the  Secretary  of  the  Treas- 
ury. He  was  held,  however,  to  be  independent  of  the  Secretary, 
inasmuch  as  the  Secretary  had  no  power  to  remove  him.  The 
Deputy  Comptroller  was  a  Civil  Service  employee  appointed  by 
the  Secretary  of  the  Treasury  for  no  definite  term,  and  could  be 
removed  by  the  Secretary  at  any  time.  During  the  absence  or 
inability  of  the  Comptroller,  or  during  a  vacancy  in  that  office, 
all  the  duties,  powers  and  responsibilities  of  the  Comptroller 
devolved  by  law  upon  the  Deputy  as  Acting  Comptroller,  but  he 
had  not  that  independence  of  the  Secretary  that  the  Comptroller 
had. 

While  acting  during  the  absence  or  inability  of  the  Comptrol- 
ler he  was  expected  to  carry  out  the  Comptroller's  policies  and 
be  governed  by  his  rulings  and  interpretations  of  the  law,  whether 
such  policies,  rulings  or  interpretations  were  in  accord  with  his 
views  or  not.  When  acting  during  a  vacancy  in  the  office  he  was 
expected  to  confer  with  the  Secretary  of  the  Treasury  in  regard 
to  the  more  important  affairs  of  the  Bureau  and  be  guided  by  his 
instructions.  But  whatever  he  did  under  such  conditions,  whether 
right  or  wrong,  he  was  expected  to  assume  responsibility  therefor. 
He  could  not  divest  himself  of  such  responsibility  by  claiming 


410  ROMANCE  AND  TRAGEDY  OF  BANKING 

that  he  followed  the  direction  of  his  official  superior,  because  the 
law  vested  in  him  the  right  to  exercise  his  own  judgment,  by  con- 
ferring upon  him  all  the  duties  and  powers  of  the  Comptroller 
when  so  acting. 

On  one  occasion  when  Mr.  Murray  was  Comptroller  he  called 
the  Deputy  to  task  for  refusing,  during  his  absence,  to  follow 
his  ruling  in  regard  to  the  interpretation  of  certain  provisions 
of  the  banking  laws  which  the  Deputy  did  not  believe  to  be  right, 
and,  being  unwilling  to  accept  responsibility  therefor,  he  ex- 
plained to  him  his  position  with  respect  to  the  rule  of  conduct 
which  governed  him  in  all  such  matters,  not  only  under  his  admin- 
istration but  also  under  those  of  his  predecessors.  He  informed 
Mr.  Murray  that  he  had  not  at  any  time  taken,  and  would  not 
take,  either  when  the  Comptroller  was  present  or  during  his 
absence,  any  position  on  any  subject  in  conflict  with  what  he 
knew  or  understood  to  be  the  Comptroller's  policy  or  position 
on  the  same  subject.  But  at  the  same  time  he  declared  that  he 
had  not  and  would  not  place  his  signature  to  any  letter  or  paper 
containing  views  which  he  did  not  approve.  He  informed  Mr. 
Murray  that  it  had  been  and  would  continue  to  be  his  practice 
to  hold  all  such  matters  for  the  Comptroller's  action  upon  his 
return,  or,  if  immediate  action  were  necessary,  to  qualify  his  posi- 
tion by  stating  that  "The  Comptroller  had  ruled,"  or  "The  Comp- 
troller holds,"  or  some  such  qualifying  phrase,  and  thus  place 
responsibility  for  the  policy  or  ruling  upon  the  Comptroller. 

The  decision  of  a  Deputy  or  Acting  Comptroller  was  seldom 
accepted  as  final  on  any  question.  Consequently,  appeals  were 
continually  being  made  to  the  Comptroller,  or  to  the  Secretary 
of  the  Treasury  if  the  office  were  vacant,  for  a  reversal  of  the 
Deputy's  ruling  or  action  in  some  instances  where  he  had  simply 
followed  the  Comptroller's  position.  Such  appeals  made  it  neces- 
sary for  the  Deputy  or  Acting  Comptroller  to  be  constantly  on 
the  defensive,  which  entailed  a  great  deal  of  extra  work  and  con- 
siderable annoyance,  especially  if  the  appellant  was  a  person  of 
some  political  influence  or  standing.  Appeals,  however,  generally 
resulted  in  the  Deputy  or  Acting  Comptroller  being  sustained  by 
his  official  superior,  as  his  action  was  invariably  based  upon  law, 


ROMANCE  AND  TRAGEDY  OF  BANKING  411 

precedent  or  approved  practice,  and  the  same  action,  if  taken  by 
the  Comptroller,  would  have  been  accepted  without  question. 

Assistant  Secretary  Williams,  by  direction  of  the  Secretary 
of  the  Treasury,  was  authorized  to  keep  in  close  touch  with  the 
affairs  of  the  Comptroller's  office  during  the  vacancy  in  that  office 
following  the  expiration  of  Mr.  Murray's  term,  and  the  change 
which  had  taken  place  in  the  political  complexion  of  the  Govern- 
ment. In  accordance  with  this  understanding  and  at  Mr.  Wil- 
liams' request  the  Acting  Comptroller  advised  him  of  the  serious 
condition  of  the  First-Second  National  Bank  of  Pittsburgh  and 
the  desire  of  the  examiners  for  a  conference  on  the  situation. 

This  conference  was  held  on  July  2,  1913,  in  the  office  of  the 
Secretary  of  the  Treasury,  at  which  the  Secretary,  Assistant 
Secretary,  Acting  Comptroller  and  one  of  the  examiners  were 
present,  and  the  affairs  of  the  bank  were  reviewed  in  detail.  The 
condition  of  the  bank  seemed  to  be  critical  and  hopeless,  and  at 
the  suggestion  of  Assistant  Secretary  Williams,  a  Pittsburgh 
banker,  the  president  of  a  rival  bank,  one  of  the  smaller  institu- 
tions, was  requested  to  come  to  Washington  for  consultation. 
The  condition  of  the  bank  was  made  known  to  him  by  the  Assist- 
ant Secretary,  who  instructed  the  examiners  to  go  over  their 
report  with  him  in  detail,  with  a  view  to  having  his  bank  come 
to  the  relief  of  the  situation. 

This  suggestion  was  an  impracticable  proposition  to  submit 
to  so  small  a  bank  when  the  amount  of  the  liabilities  of  the  First- 
Second  National  Bank  was  considered,  and,  of  course,  nothing 
came  of  it.  The  examiners  were  then  instructed  to  return  to 
Pittsburgh  and  confer  with  a  committee  of  the  Clearing  House 
Association  in  regard  to  the  situation. 

On  July  4  the  examiners  telephoned  the  Acting  Comptroller 
that  they  had  been  in  consultation  with  a  committee  of  the  Clear- 
ing House  Association,  but  without  results,  and  that  the  commit- 
tee declined  to  further  consider  the  matter  unless  the  Acting 
Comptroller  came  to  Pittsburgh  for  a  conference. 

The  Acting  Comptroller  went  immediately  to  Pittsburgh, 
arriving  there  early  on  the  morning  of  July  5.  In  the  meantime, 
one  of  the  Pittsburgh  bankers  got  into  communication  with 


412          ROMANCE  AND  TRAGEDY  OF  BANKING 

Assistant  Secretary  Williams,  who  was  then  at  Blue  Ridge  Sum- 
mit, Pa.,  and  requested  him  to  come  to  Pittsburgh. 

The  Acting  Comptroller  arranged  for  a  conference  with  the 
Clearing  House  Association  at  ten  o'clock  on  the  morning  of 
July  5,  and  while  the  conference  was  in  progress  Mr.  Williams 
came  in.  Some  of  the  bankers  present  were  inclined  to  resent 
his  presence  at  the  conference  on  the  ground  that  as  neither  the 
Secretary  of  the  Treasury  nor  the  Assistant  Secretary  had  any 
supervision  of  national  banks,  that  power  being  conferred  by  law 
exclusively  upon  the  Comptroller  of  the  Currency,  he  had  no  right 
to  inject  himself  into  the  conference.  The  condition  of  the  bank, 
however,  was  thoroughly  discussed  and  various  propositions  were 
suggested  to  the  representatives  of  the  Clearing  House  banks 
with  a  view  to  having  them  render  the  directors  of  the  First- 
Second  National  Bank  the  financial  assistance  necessary  to  enable 
them  to  meet  the  demands  of  the  depositors  and  other  creditors 
in  the  event  of  a  run  on  the  bank,  and  thus  avoid  the  closing  of 
the  institution  and  the  locking  up  of  a  large  amount  of  money 
for  an  indefinite  period. 

Secretary  Williams  assured  the  bankers  that  if  they  needed 
any  funds  to  enable  them  to  meet  the  situation  the  Treasury 
Department  would  make  a  deposit  of  public  moneys  in  the  Pitts- 
burgh banks  to  the  extent  of  $5,000,000  to  be  used  for  that 
purpose. 

This  conference  consumed  nearly  an  entire  day  without 
accomplishing  anything. 

The  Acting  Comptroller  then  arranged  with  the  president  of 
the  First-Second  National  Bank  for  a  meeting  of  the  board  of 
directors  of  the  bank  on  Sunday  morning,  July  6,  at  ten  o'clock, 
and  the  conference  with  the  Clearing  House  Association  ad- 
journed to  await  the  result  of  the  meeting  with  the  directors  of 
the  First-Second  National  Bank. 

Secretary  Williams  returned  on  Saturday  night  to  Blue  Ridge 
Summit.  Before  leaving  he  requested  the  Acting  Comptroller  to 
advise  him  by  telephone  on  Sunday  afternoon  the  result  of  the 
conference  with  the  directors  of  the  bank.  There  was  considerable 
nervousness  over  the  situation,  in  which  the  Secretary  of  the 
Treasury  and  Mr.  Williams  shared.  The  officers  of  the  bank  had 


ROMANCE  AND  TRAGEDY  OF  BANKING  413 

pictured  to  Mr.  Williams  the  disastrous  consequences  that  would 
result  from  the  closing  of  the  bank.  It  was  claimed  that  such 
action  on  the  part  of  the  Government  would  cause  a  run  on  every 
bank  in  Pittsburgh  and  precipitate  a  panic  that  would  become 
general  throughout  the  country. 

That  is  the  usual  claim  made  by  officers  of  tottering  banks 
when  all  other  efforts  have  failed  to  dissuade  the  Comptroller 
from  taking  possession  of  them,  the  extent  of  the  predicted  dis- 
aster varying  with  the  size  of  the  bank. 

Mr.  Williams  was  thoroughly  imbued  with  the  idea  that  dire 
consequences  would  follow  the  failure  of  this  bank  because  of  the 
numerous  corporations  with  which  its  president  and  his  brother 
were  connected  and  their  diversified  interests,  and  therefore  he 
was  strongly  opposed  to  the  Government  taking  possession  of 
the  bank.  Some  of  the  Clearing  House  bankers  were  also  of  the 
same  opinion. 

The  Acting  Comptroller,  however,  contended  that  the  only 
banks  that  would  be  seriously  affected  by  the  failure  were  those 
in  Pittsburgh  and  vicinity  with  which  the  Kuhn  brothers  were 
connected,  and  he  expressed  his  convictions  at  the  time  that  the 
disturbance  would  not  extend  beyond  such  banks. 

At  the  conference  on  Sunday  morning  the  examiners  discussed 
with  the  directors  of  the  First-Second  National  Bank  the  prin- 
cipal items  on  which  losses  were  estimated  and  the  transactions 
of  a  criminal  nature  which  they  had  discovered.  This  conference 
lasted  from  ten  o'clock  in  the  morning  until  about  three  in  the 
afternoon. 

The  Acting  Comptroller  advised  the  directors  that  if  the 
Clearing  House  Association  would  guarantee  the  payment  of  all 
deposit  liabilities  of  the  bank  on  demand  pending  a  reorganiza- 
tion of  the  board  of  directors  and  the  restoration  of  the  capital, 
the  bank  would  be  permitted  to  continue  business  while  this  was 
being  done. 

One  member  of  the  board  offered  to  contribute  his  full  share 
of  the  amount  necessary  to  make  up  the  deficiency  in  capital,  but 
suggested  that  in  view  of  the  facts  disclosed  by  the  examiners 
and  the  rumors  on  the  street  that  the  bank  was  in  a  very  bad 
condition,  he  thought  it  would  be  better  for  the  Government  to 


414  ROMANCE  AND  TRAGEDY  OF  BANKING 

take  possession  of  the  bank  and  liquidate  its  affairs.  He  thought 
this  would  be  for  the  best  interests  of  all  creditors  alike.  He 
stated  that  he  believed  if  the  bank's  doors  were  opened  on  Monday 
morning  some  of  the  depositors  who  had  knowledge  of  its  condi- 
tion would  withdraw  their  balances  and  thus  secure  a  preference 
over  other  creditors  who  had  no  such  knowledge.  He  stated  that 
the  interests  of  the  small  depositors  should  be  protected  and  he 
did  not  think  it  would  be  fair  to  open  the  doors  and  allow  the 
large  deposit  balances  to  be  withdrawn  through  the  Clearing 
House  and  otherwise  and  leave  the  small  and  out-of-town  depos- 
itors to  share  in  what  remained. 

Such  of  the  other  directors  present  as  expressed  any  views 
on  the  subject  approved  the  course  suggested,  and  all  were  of  the 
opinion  that  to  undertake  to  make  up  the  deficiency  in  capital 
stock  by  assessment  of  the  shareholders  and  keep  the  bank  in 
operation  at  the  same  time  was  impossible. 

A  committee  of  the  directors,  therefore,  was  appointed  to 
confer  with  the  Clearing  House  Committee  to  determine  what,  if 
anything,  could  be  done  toward  securing  from  the  Clearing  House 
Association  a  guaranty  of  the  deposit  liabilities  of  the  bank  pend- 
ing a  reorganization  of  its  affairs  and  the  payment  of  an  assess- 
ment by  the  stockholders  to  make  good  the  impaired  capital. 

A  meeting  was  held  with  the  Clearing  House  Committee  at 
about  five  o'clock  on  the  evening  of  the  same  day,  when  the  prop- 
osition above  outlined  was  again  submitted,  but  the  Clearing 
House  Committee  rejected  the  proposition  because  of  the  fact 
that  the  bank  held  slow  and  non-liquid  assets  equal  to  three  times 
the  amount  of  its  capital  stock  and  they  were  averse  to  tying  up 
for  a  long  time  several  millions  of  dollars  in  slow  and  unproduc- 
tive real  estate  and  other  non-liquid  securities. 

The  Clearing  House  Committee  and  the  committee  of  the 
directors  were  then  advised  by  the  Acting  Comptroller  that  the 
bank  would  not  be  permitted  to  open  for  business  in  the  morning, 
as  two  hundred  thousand  dollars  had  been  transferred  the  day 
before  to  another  bank  in  Pittsburgh  and  it  was  rumored  that 
a  number  of  correspondent  banks  in  the  vicinity  and  elsewhere 
were  arranging  to  withdraw  their  balances.  It  was  also  reported 
that  Telling,  the  president  of  the  bank,  had  stated  that  he  felt 


ROMANCE  AND  TRAGEDY  OF  BANKING  415 

morally  obligated  to  protect  certain  accounts  which  he  was  in- 
strumental in  bringing  into  the  bank  and  had  advised  such  depos- 
itors to  withdraw  their  balances. 

The  final  conference  with  the  Clearing  House  Committee  was 
concluded  so  late  in  the  day  that  the  Acting  Comptroller  did  not 
communicate  the  result  to  Secretary  Williams  by  telephone  as 
requested,  but  one  of  the  directors  of  the  First-Second  National 
Bank  got  into  communication  with  him  and  informed  him  that  the 
Acting  Comptroller  intended  taking  possession  of  the  bank  on 
Monday  morning.  Mr.  Williams  was  reported  as  having  instructed 
the  director  to  say  to  the  Acting  Comptroller  that  under  no  cir- 
cumstances should  the  bank  be  closed,  and  to  have  the  Acting 
Comptroller  communicate  with  him  by  telephone  immediately. 

The  Acting  Comptroller  got  into  communication  with  Mr. 
Williams  and  informed  him  briefly  of  the  situation  and  that  it 
was  his  purpose  to  close  and  take  possession  of  the  bank  early 
Monday  morning,  as  nothing  else  remained  to  be  done.  Mr.  Wil- 
liams suggested  delay  in  taking  possession  until  nine  o'clock.  He 
was  told  that  the  bank  practically  opened  at  eight  o'clock,  as 
many  of  the  employees  came  in  at  that  hour  to  get  ready  for  the 
day's  business,  and  that  it  was  necessary  for  the  examiners  to 
take  possession  of  everything  and  seal  up  the  vaults  and  safes 
before  their  arrival. 

Mr.  Williams  then  suggested  withholding  the  posting  of  a 
notice  on  the  doors  of  the  bank  until  he  reached  there,  and  stated 
that  he  would  take  the  early  morning  train  due  to  arrive  in  Pitts- 
burgh at  7.30. 

The  Acting  Comptroller  and  the  examiners  went  to  the  bank 
at  seven  o'clock  on  Monday  morning  and  the  examiners  proceeded 
to  place  their  seals  on  the  vaults,  safes,  boxes,  and  everything  that 
was  supposed  to  contain  anything  of  value.  At  eight  o'clock, 
Mr.  Williams  not  having  arrived,  it  was  learned  through  inquiry 
by  telephone  at  the  depot  that  the  Western  Maryland  train  due 
to  arrive  at  seven-thirty  was  over  a  half-hour  late.  As  the  clerks 
were  beginning  to  assemble  in  the  bank  and  a  number  of  foreigners 
had  gathered  around  the  door,  presumably  to  purchase  steamship 
tickets,  the  Acting  Comptroller  instructed  the  examiners  to  take 


416          ROMANCE  AND  TRAGEDY  OF  BANKING 

possession  and  post  a  notice  on  the  doors  that  the  bank  was  closed 
and  in  the  hands  of  the  Comptroller  of  the  Currency. 

Subsequently  it  was  learned  that  on  Sunday  night  one  of  the 
bankers  who  was  present  at  the  conference  with  the  Clearing 
House  Committee  sent  a  night  letter  to  correspondent  banks 
advising  them  to  transfer  their  deposit  balances  to  his  bank  on 
Monday  morning. 

When  Mr.  Williams  reached  the  bank  about  8.15,  he  found 
the  doors  closed,  a  policeman  on  guard,  and  a  number  of  people 
standing  around  reading  the  notice.  He  was  then  informed  in 
detail  of  the  efforts  made  to  save  the  bank  and  the  failure  to 
obtain  any  assistance  from  the  Clearing  House  Association 
beyond  an  understanding  that  they  could  take  care  of  the  situa- 
tion in  Pittsburgh  outside  of  this  bank  without  any  aid  from  the 
United  States  Treasury. 

The  bank  was  declared  to  be  insolvent  and  was  placed  in  the 
hands  of  a  receiver  on  July  7,  1913.  It  remained  in  charge  of  a 
receiver  until  April  25,  1914,  when,  after  reorganization  of  the 
board  of  directors,  it  was  allowed  to  resume  business  with  a  fully- 
paid-in  capital  stock  of  $4,000,000. 

On  the  date  of  failure  the  total  liabilities  of  the  bank 
amounted  to  $29,656,512.52,  and  deposits  of  all  kinds  aggre- 
gated nearly  $30,0^0,000.  In  point  of  total  assets  and  deposit 
liabilities  this  was  at  that  time  the  largest  bank  failure  in  the 
history  of  the  national  system. 

As  predicted  by  the  Acting  Comptroller,  the  disturbance 
caused  by  the  failure  was  wholly  local  and  was  confined  to  a  pro- 
tracted run  on  the  Pittsburgh  Bank  for  Savings,  of  which  the 
Kuhn  interests  were  in  control,  and  the  temporary  closing  of  the 
First  National  Bank  of  McKeesport,  of  which  one  of  the  Kuhn 
brothers  was  president. 

The  following  day,  after  communicating  with  Mr.  Williams, 
the  Secretary  of  the  Treasury  gave  to  the  press  a  statement  cover- 
ing the  condition  of  the  bank  and  the  necessity  for  closing  it,  and 
he  and  Assistant  Secretary  Williams  received  numerous  congratu- 
lations upon  the  failure  of  the  predicted  panic  to  materialize  and 
the  excellent  manner  in  which  they  handled  the  situation  and 
averted  a  panic. 


417 

Nothing  succeeds  like  success. 

Eighteen  months  after  the  failure,  Oscar  L.  Telling,  the 
former  president  of  the  First  National  Bank,  and  Francis  H. 
Richard,  the  former  cashier,  were  indicted  by  the  Federal  Grand 
Jury  on  twenty-three  counts  charging  them  with  misappropria- 
tion of  the  funds  of  the  bank,  abstraction,  false  entries  in  the 
books,  etc.  A  bench  warrant  was  immediately  issued  for  the 
arrest  of  Richard,  who  was  placed  under  bond  to  await  trial. 

Telling,  the  other  defendant,  went  into  hiding  immediately 
following  the  closing  of  the  bank,  and  later  fled  to  Europe,  where 
he  remained  a  fugitive  from  justice  until  after  the  trial  and  fail- 
ure to  convict  Richard,  the  cashier,  when  he  returned  to  this 
country.  He  never  was  brought  to  trial,  as  the  ruling  of  the 
court  in  the  Richard  case  made  it  impossible  to  secure  a  con- 
viction. 

Telling,  a  few  years  before  becoming  president  of  the  First 
National  Bank,  was  a  clerk  in  the  office  of  the  Comptroller  of  the 
Currency.  He  was  transferred  from  a  clerkship  in  the  Mint  at 
Denver  in  exchange  for  a  stenographer  in  the  Comptroller's  office 
who  desired  to  remove  to  Denver  on  account  of  the  health  of  his 
child.  Telling  ingratiated  himself  into  the  confidence  of  Mr. 
Murray,  when  the  latter  became  Comptroller,  who  appointed  him 
a  national  bank  examiner.  His  record  as  an  examiner  was  a  dis- 
grace to  the  service,  a  discredit  to  the  Comptroller's  office,  and  a 
reflection  upon  the  Comptroller  who  appointed  him. 

On  July  9,  1913,  immediately  after  the  Acting  Comptroller 
returned  to  Washington,  he  had  a  conference  with  Assistant 
Secretary  Williams  in  regard  to  the  situation  in  Pittsburgh  when 
he  left  there,  and  Mr.  Williams  inquired  of  him  whether  he  knew 
of  any  other  bank  that  was  in  as  bad  a  condition  as  the  First- 
Second  National  of  Pittsburgh.  The  Acting  Comptroller  advised 
him  that  there  was  a  bank  in  Washington,  right  under  the  eyes  of 
the  Treasury  Department — the  United  States  Trust  Company — 
the  capital  of  which  was  known  to  be  badly  impaired  and  the 
condition  otherwise  very  unsatisfactory,  and  had  been  for  a  long 
time.  Mr.  Williams  then  remarked  that  he  did  not  think  it  advis- 
able to  stir  up  any  further  trouble  at  that  time. 


418  ROMANCE  AND  TRAGEDY  OF  BANKING 

The  United  States  Trust  Company 

The  United  States  Trust  Company  was  organized  in  1907, 
under  authority  of  an  Act  of  Congress  approved  October  1,  1890, 
authorizing  the  formation  of  trust  companies  in  the  District  of 
Columbia  with  a  capital  stock  of  not  less  than  one  million  dollars. 
This  company  had  a  turbulent  career  from  the  beginning,  owing 
to  internal  dissensions  which  resulted  in  frequent  changes  in  the 
personnel  of  the  board  of  directors  and  the  managing  officers  of 
the  institution. 

In  January,  1911,  control  of  the  company  passed  into  the 
hands  of  Eldridge  E.  Jordan,  who  became  its  president.  A  little 
later,  because  of  dissatisfaction  with  him  and  his  methods,  he  was 
superseded  by  N.  B.  Scott,  ex-United  States  Senator  from  West 
Virginia.  In  a  very  short  time  Mr.  Scott  was  succeeded  again  by 
Mr.  Jordan,  under  whose  domination  the  company  remained  until 
its  failure  on  November  21,  1913,  although  nominally  succeeded 
by  Lawrence  O.  Murray,  former  Comptroller  of  the  Currency, 
in  April,  1913. 

Mr.  Jordan  made  his  first  appearance  in  banking  in  the  city 
of  Washington  in  the  Merchants  and  Mechanics  Savings  Bank, 
a  small  institution  located  on  Seventh  Street.  Later  he  became 
connected  with  the  Traders  National  Bank,  which  institution  he 
merged  with  the  Merchants  and  Mechanics  Savings  Bank  in 
April,  1908.  Subsequently,  he  merged  the  last-named  bank  and 
the  International  Banking  Corporation  with  the  United  States 
Trust  Company.  He  also  became  connected  with  the  Commercial 
National  Bank  and  because  of  his  attempted  domination  of  this 
bank  several  of  its  officers  and  directors  withdrew  from  the  con- 
cern and  organized  the  Federal  National  Bank. 

The  records  of  the  Comptroller's  office  show  Mr.  Jordan  to 
have  been  the  cause  of  disturbance  and  dissensions  in  every  bank 
in  the  District  of  Columbia  with  which  he  had  been  connected, 
and  a  source  of  anxiety  to  the  Comptroller  and  the  banking  inter- 
ests of  Washington  generally,  because  of  his  unlawful,  speculative 
and  hazardous  methods. 

The  records  show  that  many  of  the  transactions  with  which 
Jordan  was  connected  were  hazardous  in  the  extreme  and  that  he 


ROMANCE  AND  TRAGEDY  OF  BANKING  419 

was  regarded  as  a  most  daring  and  reckless  speculator.  For  some 
time  after  his  retirement  from  the  presidency  of  the  Merchants 
and  Mechanics  Savings  Bank,  the  Comptroller  objected  to  his 
becoming  connected  with  the  management  of  any  banking  institu- 
tion in  Washington,  and  Comptroller  Murray  made  the  remark 
that  if  he  had  the  authority  he  would  prohibit  him  from  walking 
on  the  same  side  of  the  street  on  which  a  bank  was  located. 

In  January,  1911,  however,  after  Mr.  Jordan  acquired  con- 
trol of  the  United  States  Trust  Company,  Mr.  Murray,  for  some 
unknown  reason,  withdrew  his  objection  to  Mr.  Jordan  in  the 
following  signed  letter,  dated  January  9,  1911 : 

The  Comptroller  has  carefully  read  this  report  and  I 
would  be  justified  in  making  objection  to  Mr.  Jordan  again 
becoming  connected  with  any  banking  institution  under  the 
supervision  of  the  Comptroller  of  the  Currency. 

It  is  my  wish,  however,  to  take  a  kindlier  view  of  the 
situation,  and  will  interpose  no  objection  to  Mr.  Jordan's 
entry  into  the  banking  business. 

The  last  examination  of  this  company,  previous  to  its  failure, 
was  made  on  January  8,  1913,  at  which  time  losses  were  reported 
by  the  examiner  aggregating  $256,150,  impairing  the  capital  to 
the  extent  of  over  $177,000.  This  examination  was  interrupted 
and  prolonged  until  the  following  April,  when  on  April  26  a  con- 
ference was  held  with  some  of  the  officers  and  directors  of  the 
bank  in  the  office  of  the  Deputy  Comptroller.  As  Comptroller 
Murray's  term  was  about  to  expire,  he  requested  the  Deputy 
Comptroller  to  take  the  matter  up  with  the  directors,  inasmuch 
as,  he  stated,  the  Deputy  would  have  it  to  handle  after  he  left  the 
office. 

The  condition  of  the  company's  affairs  was  gone  over  in  detail 
with  the  directors  by  the  examiner  who  made  the  examination  and 
the  Deputy  Comptroller,  and  the  directors  were  required  to  make 
up  the  deficiency  in  the  capital  stock  without  delay  by  the  substi- 
tution of  cash  or  its  equivalent  for  some  of  the  depreciated  assets, 
and  paper  and  securities  on  which  losses  were  estimated. 

The  directors  would  not  concede  the  capital  to  be  impaired 
and  would  not  agree  to  put  in  the  cash.  They  wanted  time  to 


420  ROMANCE  AND  TRAGEDY  OF  BANKING 

work  out  the  unsatisfactory  condition  without  interference  by 
the  Comptroller's  office.  The  Deputy  Comptroller,  however, 
insisted  upon  the  capital  being  made  good  in  the  way  above  sug- 
gested, otherwise  he  would  serve  formal  notice  on  the  bank  declar- 
ing the  capital  to  be  impaired  and  requiring  a  meeting  of  the 
shareholders  to  be  called  for  the  purpose  of  voting  an  assessment 
of  the  stock. 

Appeal  was  then  made  to  Comptroller  Murray,  who  took  the 
matter  out  of  the  Deputy's  hands  and  accepted  a  bond  executed 
by  some  of  the  directors  in  the  sum  of  sixty  thousand  dollars  to 
indemnify  the  depositors  in  the  company  against  any  existing  or 
future  loss  occasioned  by  depreciation  of  a  certain  asset  which 
was  being  carried  on  the  books  at  a  valuation  of  $851,000,  and 
on  which  the  examiner  had  estimated  a  loss  of  $121,000. 

Most  of  the  directors  who  executed  this  bond  were  then  heav- 
ily indebted  to  the  company,  and  some  of  them  were  unable  to 
pay  their  individual  obligations  at  that  time. 

The  Deputy  Comptroller  did  not  regard  this  bond  as  of  any 
value  and  did  not  approve  of  that  method  of  making  good  an 
impairment  of  the  bank's  capital. 

A  few  days  after  this  conference  Comptroller  Murray 
accepted  the  presidency  of  this  institution,  but  did  not  remain 
with  it  long.  He  resigned  in  less  than  six  months  after  his  accept- 
ance of  the  office,  giving  as  a  reason  therefor,  as  stated  by  the 
examiner,  that  he  could  not  tolerate  Jordan's  banking  methods. 

The  Deputy  Comptroller  was  of  the  opinion  that  the  tender 
of  the  position  to  him  in  the  first  place  was  mainly  for  the  pur- 
pose of  forestalling  any  attempt  on  the  deputy's  part  to  compel 
the  directors  to  make  good  the  impaired  capital  of  the  bank  by 
the  substitution  of  cash  or  its  equivalent  for  the  bad  assets  or  by 
an  assessment  of  the  stock. 

The  directors  also  entered  into  a  signed  agreement  prom- 
ising to  charge  off  certain  listed  assets  which  the  examiner  de- 
clared to  be  worthless  and  to  collect  or  secure  other  doubtful  or 
questionable  loans  aggregating  $1,070,000. 

In  November,  1913,  the  bank  was  due  again  for  examination 
in  regular  order  and  an  examiner  other  than  the  one  who  made 
the  several  previous  examinations,  and  one  of  the  most  efficient 


ROMANCE  AND  TRAGEDY  OF  BANKING  421 

men  in  the  service,  was  assigned  to  the  work.  This  examination 
was  commenced  on  November  15,  1913,  and  continued  until  No- 
vember 20,  when  a  run  started  which  closed  the  bank  and  its 
branches. 

This  examination  disclosed  that  no  honest  efforts  had  been 
made  by  the  management  to  carry  out  in  good  faith  the  terms  of 
the  bond  or  the  agreement  to  collect,  secure  or  charge  off  the 
doubtful  paper  and  losses,  and  that  the  bank  was  in  a  much  worse 
condition  than  at  the  time  of  the  former  examination. 

The  asset  previously  carried  at  a  valuation  of  $851,000, 
covered  by  the  bond  accepted  by  Comptroller  Murray,  had  been 
padded  $21,000,  and  the  more  than  one  million  of  doubtful  assets 
listed  in  the  signed  agreement  to  collect,  secure,  reduce  and 
charge  off  had  been  curtailed  only  $163,000. 

As  an  illustration  of  the  methods  of  manipulation  that  were 
resorted  to  in  this  bank  the  examiner  reported  that  about  a  year 
before  the  absorption  of  the  Merchants  and  Mechanics  Savings 
Bank  by  the  United  States  Trust  Company  in  April,  1912, 
Eldridge  E.  Jordan,  then  president  of  the  savings  bank,  un- 
loaded a  certain  office  building  in  the  city  of  Washington  on  the 
bank  in  the  following  manner : 

He  traded  a  building  owned  by  him  and  valued  at  from  $250,- 
000  to  $300,COO  for  the  office  building  mentioned,  subject  to  a 
mortgage  of  $375,000  on  the  latter  building.  He  then  trans- 
ferred his  equity  in  the  office  building  to  the  Merchants  and 
Mechanics  Savings  Bank  for  $362,500,  taking  in  payment  there- 
for $62,500,  in  cash  and  2,000  shares  of  the  capital  stock  of 
the  savings  bank.  The  directors  of  the  savings  bank,  it  was 
claimed,  did  not  know  of  this  purchase  until  the  sale  had  been 
consummated,  and  Jordan,  it  was  stated,  admitted  that  he  made 
a  profit  in  the  transaction  of  $40,000. 

This  investment  of  the  funds  of  the  savings  bank  by  Jordan 
resulted  in  a  disruption  of  the  board  of  directors  and  the  resig- 
nation of  Jordan. 

It  appears  further  that  the  Merchants  and  Mechanics  Savings 
Bank  then  organized  a  building  company  with  a  capital  stock  of 
ten  thousand  dollars  to  carry  this  office  building  and  issued  bonds 
for  the  remainder  of  the  investment. 


422          ROMANCE  AND  TRAGEDY  OF  BANKING 

In  April,  1912,  the  Merchants  and  Mechanics  Savings  Bank 
was  absorbed  by  the  United  Sttaes  Trust  Company.  At  that 
time  the  stock  of  the  building  company  was  carried  by  the  savings 
bank  at  ten  thousand  dollars.  In  order  to  provide  the  necessary 
funds  for  the  purchase  of  the  savings  bank  the  stock  of  the  build- 
ing company  was  then  inflated  $69,192.86.  Shortly  afterward 
$3,2-7.14  was  charged  to  this  account  and  the  account  further 
inflated  by  that  amount. 

When  the  United  States  Trust  Company  purchased  the  Inter- 
national Banking  Corporation  the  directors  of  the  former  com- 
pany were  reported  as  having  placed  a  note  in  the  assets  of  the 
bank  for  which  a  certificate  of  deposit  was  issued  for  $30,000. 
When  it  became  necessary  to  pay  this  certificate  the  directors' 
note  was  eliminated  from  the  assets  and  the  value  of  the  stock  in 
the  building  company  was  further  inflated  thirty  thousand  dollars. 

This  account  was  also  further  inflated  by  the  amount  of  the 
purchase  price  of  ten  parcels  of  real  estate  which  the  United 
States  Trust  Company  found  necessary  to  acquire  in  order  to 
protect  second  deeds  of  trust  which  the  company  held  against 
such  properties. 

In  May,  1913,  in  order  to  eliminate  from  the  assets  of  the 
bank  a  note  of  the  building  company  for  twenty-one  thousand 
dollars,  the  stock  of  the  company  was  again  inflated  by  this 
amount,  making  a  total  inflation  of  $123,000. 

While  the  examination  was  in  progress  and  for  some  time 
previous  thereto  negotiations  were  being  carried  on  between  Mr. 
Jordan  and  the  president  of  a  national  bank  in  Washington  with 
a  view  to  merging  the  bank  with  the  trust  company.  At  this 
time  Jordan  was  chairman  of  the  board  of  directors  of  the  trust 
company,  and  in  reality  president  of  the  company,  as  Mr.  Murray 
had  resigned  the  presidency  several  months  previously.  In  fur- 
therance of  the  negotiations  to  merge  the  two  institutions  Mr. 
Jordan  requested  the  bank  examiner  to  make  a  joint  examination 
of  the  company  with  the  banker  with  whom  he  was  negotiating. 
The  examiner  informed  Mr.  Jordan  that  he  would  submit  his  re- 
quest to  the  Acting  Comptroller  as  he  could  not  make  the  exami- 
nation without  authority. 


423 

Knowing  the  condition  of  the  trust  company  to  be  very  un- 
satisfactory, and  having  in  mind  the  criticisms  to  which  the 
Comptroller's  office  was  subjected  in  connection  with  the  joint 
examination  of  the  assets  of  the  First  and  Second  National  Banks 
of  Pittsburgh  by  the  national  bank  examiner  and  the  appraise- 
ment committee  composed  of  a  representative  of  each  bank  prior 
to  their  consolidation,  the  Acting  Comptroller  did  not  look  with 
favor  on  the  proposition,  and  instructed  the  examiner  to  advise 
Mr.  Jordan  that  the  banker  and  his  associates  must  make  their 
own  examination  and  appraisement  of  the  assets,  but  after  doing 
so  there  would  be  no  objection  to  his  conferring  with  them  in 
regard  to  any  of  the  assets  about  which  there  was  any  difference 
in  valuations.  The  examiner  and  the  officers  of  the  company  dif- 
fered very  materially  as  to  the  value  of  certain  of  the  principal 
assets  and  the  Acting  Comptroller  desired  to  obtain  the  inde- 
pendent judgment  of  the  banker  and  his  associates  in  regard  to 
these  disputed  items. 

Following  these  instructions  the  examiner  conferred  with  the 
banker  and  his  associates  after  they  had  made  their  own  ap- 
praisement of  these  particular  assets,  and  on  every  item  the  loss 
or  depreciation  estimated  by  them  was  greater  than  that  esti- 
mated by  the  examiner. 

They  also  expressed  grave  doubts  as  to  the  solvency  of 
the  company  and  regarded  the  condition  of  its  affairs  as  so 
alarming  and  the  situation  so  menacing  to  the  banking  commu- 
nity of  Washington  as  to  call  for  immediate  action  on  the  part 
of  the  clearing-house  banks  to  strengthen  and  fortify  themselves 
against  any  unusual  demands. 

On  the  morning  of  November  18,  1913,  the  examiner  again 
conferred  with  the  Acting  Comptroller  in  regard  to  the  situa- 
tion, which  was  considered  very  verious,  and  the  Acting  Comp- 
troller instructed  him  to  arrange  for  an  immediate  meeting  of 
the  board  of  directors  of  the  trust  company  in  the  office  of  the 
Comptroller.  He  took  the  matter  up  with  the  treasurer  of  the 
company,  who  informed  him  that  some  of  the  directors  were  out 
of  town  and  an  immediate  meeting  could  not,  therefore,  be  held. 
The  treasurer  suggested  that  a  meeting  be  called  for  4.30  in 
the  afternoon  of  the  following  day,  November  19.  The  Act- 


424          ROMANCE  AND  TRAGEDY  OP  BANKING 

ing  Comptroller  then  communicated  by  telephone  with  the  treas- 
urer of  the  company  and  insisted  upon  an  immediate  meeting  of 
the  officers  and  directors  who  were  in  the  city.  The  treasurer 
stated  that  an  earlier  meeting  than  the  time  stated  could  not  be 
had  as  some  of  the  directors  were  absent  and  those  who  were  in 
the  city  had  important  engagements.  The  Acting  Comptroller 
informed  him  that  no  officer  or  director  of  the  company  could 
have  any  engagement  of  more  importance  than  his  attendance  at 
this  meeting  which  must  be  held  at  once.  He  stated  he  would  see 
what  could  be  done  and  would  advise  the  Acting  Comptroller 
later.  Not  hearing  from  him  near  the  close  of  business  on  that 
day  the  Acting  Comptroller  called  him  again  by  telephone  and 
he  said  the  earliest  hour  he  could  arrange  for  a  meeting  was 
twelve  o'clock  on  the  following  day.  The  Acting  Comptroller 
advised  him  that  a  meeting  must  be  had  that  night.  He  said  that 
was  impossible.  He  was  then  advised  that  it  must  be  had  not 
later  than  nine  o'clock  the  next  morning  and  that  he  would  ex- 
pect to  see  the  directors  at  that  hour  in  the  Comptroller's  office. 

At  the  close  of  business  on  the  same  day  the  examiner  and 
the  banker  who  examined  the  assets  came  into  the  Comptroller's 
office  for  the  purpose  of  discussing  the  situation  and  determining 
what  should  be  done.  The  banker  declared  that  all  negotiations 
were  off  for  a  merger  of  the  two  institutions  and  expressed  a  seri- 
ous doubt  as  to  the  solvency  of  the  trust  company. 

After  discussing  all  phases  of  the  situation  it  was  deemed 
advisable  to  call  into  conference  the  representatives  of  the  prin- 
cipal clearing-house  banks  in  order  that  some  arrangement  might 
be  made  to  take  care  of  the  situation  which  had  reached  a  critical 
stage.  Accordingly  the  presidents  of  seven  or  eight  of  the  largest 
banks  in  Washington  were  requested  to  meet  that  night  in  the 
office  of  the  bank  examiner. 

The  condition  of  the  trust'  company  was  then  explained  to 
them  in  a  general  way.  No  information  was  given  them  in  regard 
to  the  affairs  of  the  company  that  the  banker  and  his  associates 
who  had  examined  the  assets  did  not  already  know  and  there  was 
not  a  banker  present  who  did  not  know  and  had  not  known  for 
at  least  a  year  that  the  trust  company  was  and  had  been  in  a  very 


ROMANCE  AND  TRAGEDY  OF  BANKING  425 

unsatisfactory  and  unsafe  condition,  and  the  subject  of  criticism 
by  the  Comptroller  of  the  Currency. 

Some  of  the  bankers  present  expressed  a  willingness  to  come  to 
the  assistance  of  the  trust  company  and  desired  to  know  how 
badly  it  was  involved  and  how  much  money  would  be  required  to 
meet  demands  in  the  event  of  a  run  upon  the  institution.  They 
were  told  that  while  the  company  was  believed  to  be  solvent,  its 
capital  was  impaired  to  the  extent  of  at  least  seventy-five  per 
cent.,  and  in  addition  thereto  a  large  proportion  of  the  assets 
were  of  a  slow,  doubtful  and  non-liquid  character. 

After  a  general  discussion  of  the  situation  the  conclusion  was 
reached  that  the  trust  company's  assets  were  of  such  a  nature  as 
to  make  it  impracticable  for  the  banks  upon  the  security  of  such 
assets  to  furnish  the  funds  necessary  to  meet  the  demands  that 
would  probably  be  made  upon  it.  They  concluded,  therefore,  to 
confine  their  efforts  to  taking  care  of  the  situation  outside  of  this 
institution  by  fortifying  their  banks  to  meet  any  unusual  with- 
drawals and  extending  assistance  to  each  other.  The  meeting 
adjourned  with  this  understanding,  after  the  bankers  present 
were  admonished  to  refrain  from  any  reference  to  the  meeting  or 
the  trust  company's  affairs. 

While  the  meeting  was  in  progress  two  of  the  directors  of  the 
trust  company  came  into  the  adjoining  room.  When  the  Acting 
Comptroller  was  advised  of  their  presence  he  personally  invited 
them  to  join  the  conference,  but  they  declined  to  do  so. 

The  Acting  Comptroller  then  explained  to  them  the  condi- 
tion of  the  trust  company  as  disclosed  by  the  examiner's  report, 
but  they  did  not  seem  to  appreciate  or  realize  the  seriousness  of 
the  situation.  They  were  told  that  the  capital  of  the  company 
would  have  to  be  made  good  if  the  bank  was  permitted  to  continue 
in  business,  and  they  were  asked  what  the  effect  would  be  if  a 
meeting  of  the  shareholders  were  called  for  the  purpose  of  restor- 
ing the  deficiency  in  capital  by  an  assessment  of  the  stock.  They 
expressed  the  belief  that  a  call  for  such  a  meeting  would  result 
in  closing  the  bank,  as  a  large  number  of  the  shareholders  would 
be  unable  to  respond  to  an  assessment. 

They  were  advised  by  the  Acting  Comptroller  that  such 
being  the  condition  it  would  be  more  creditable  for  the  directors 


426          ROMANCE  AND  TRAGEDY  OF  BANKING 

to  close  the  institution  and  arrange  for  its  liquidation,  reorgan- 
ization or  absorption  by  some  other  bank  than  for  the  Comp- 
troller of  the  Currency  to  close  and  take  possession  of  it,  as  he 
would  be  compelled  to  do  in  the  event  of  a  run  and  the  inability 
of  the  company  to  meet  its  demand  liabilities.  To  this  suggestion 
one  of  the  directors  replied  that  the  Comptroller  had  power  to 
close  the  bank  if  he  thought  it  advisable  to  do  so.  He  was  in- 
formed that  the  Comptroller  had  the  right  to  close  the  bank  only 
in  the  event  of  insolvency  and  that  the  bank  examiner  had  not 
reported  it  to  be  insolvent,  but  if  a  run  should  start  and  the  bank 
should  not  be  able  to  meet  all  demands  according  to  their  tenor 
the  Comptroller  would  have  authority  to  take  possession. 

The  meeting  of  the  board  of  directors  of  the  company  called 
for  nine  o'clock  on  the  following  morning  was  never  held,  but 
promptly  at  nine  o'clock  Assistant  Secretary  Williams  requested 
the  Acting  Comptroller  to  come  to  his  office  where  he  found  sev- 
eral of  the  officers  and  directors  of  the  trust  company  in  confer- 
ence with  Mr.  Williams,  headed  by  a  Richmond  (Va.)  banker, 
who  was  then  connected  with  another  bank  in  Washington,  closely 
affiliated  with  the  trust  company  in  many  of  its  transactions. 
They  had  complained  to  Secretary  Williams  of  the  action  of  the 
Acting  Comptroller  and  the  examiner  in  calling  a  meeting  of  the 
the  bankers  of  Washington  the  night  before  and  exposing  to  them 
the  condition  of  the  trust  company.  The  examiner  was  called  in 
and  they  disputed  his  valuations  of  certain  properties  owned  by 
the  company  and  his  estimates  of  losses  on  certain  notes,  claim- 
ing that  the  properties  were  worth  fully  the  amount  at  which  they 
were  carried  on  the  bank's  books  and  that  the  notes  were  col- 
lectible at  their  face  value.  They  ridiculed  any  suggestion  of 
losses  sufficient  to  impair  the  capital  and  maintained  that  the 
bank  was  solvent  and  able  to  pay  its  creditors  in  full  on  demand. 

The  examiner  had  not  yet  prepared  his  report  and  his  data 
were  not  assembled  in  a  way  to  enable  him  to  discuss  the  condition 
of  the  bank  in  an  intelligent  and  orderly  manner. 

It  was  plainly  evident  from  Mr.  Williams'  manner  at  the 
beginning  of  the  conference  that  his  mind  had  been  prejudiced  by 
the  statements  made  to  him  by  the  representatives  of  the  bank  and 
their  friends,  and  that  he  was  inclined  to  prejudge  the  case  and 


ROMANCE  AND  TRAGEDY  OF  BANKING  427 

discredit  the  examiner  before  he  was  informed  of  the  real  condi- 
tion of  affairs. 

As  an  illustration  of  this  fact  a  single  instance  may  be  stated : 

When  the  examiner  produced  an  itemized  list  of  the  notes 
which  he  regarded  as  slow,  doubtful  or  worthless,  Mr.  Williams 
found  among  them  the  name  of  a  Richmond  man  whom  he  knew 
personally,  and  he  expressed  surprise  that  the  examiner  should 
have  questioned  the  worth  of  his  paper.  He  declared  the  note  to 
be  absolutely  good  and  collectible,  and  then  proceeded  to  dis- 
credit the  examiner  before  all  who  were  assembled  in  the  room  by 
stating  that  if  his  judgment  in  regard  to  the  other  assets  of  the 
bank  were  as  faulty  as  his  judgment  of  the  value  of  this  particu- 
lar note,  his  report  was  wholly  unreliable. 

This  statement  was  made  before  the  examiner  was  given  an 
opportunity  to  say  what  he  knew  about  the  note  or  to  explain 
how  he  arrived  at  his  valuation  of  this  particular  piece  of  paper. 

Later  in  the  conference  Lancaster  Williams  of  Baltimore,  a 
brother  of  Secretary  Williams,  was  present,  and  was  asked  by 
Mr.  Williams  what  he  thought  of  the  note  in  question.  He 
promptly  replied  that  paper  of  the  same  party  had  gone  to  pro- 
test in  Baltimore  and  that  it  was  not  considered  good. 

Under  such  circumstances,  confronted  with  a  half  dozen  or 
more  officers  and  directors  of  the  trust  company  and  their  friends, 
all  antagonistic  to  the  examiner  and  more  or  less  personally  in- 
volved or  interested  in  the  bank,  and  Mr.  Williams  apparently 
biased  in  their  favor,  is  it  surprising  that  the  examiner  was  dis- 
couraged and  lost  heart  in  defending  his  position  in  regard  to  the 
condition  of  the  bank?  No  orderly  or  intelligent  consideration 
of  the  bank's  condition  could  be  maintained  under  such  circum- 
stances. 

This  conference  lasted  the  best  part  of  the  whole  day.  In  the 
meantime,  the  representatives  of  the  bank  instead  of  complying 
with  the  Acting  Comptroller's  request  for  a  conference  with  the 
board  of  directors  in  his  office,  at  which  it  was  intended  to  dis- 
cuss the  condition  of  affairs  in  detail  and  determine  what  was 
best  to  be  done,  fearing,  it  was  presumed,  that  the  Acting  Comp- 
troller contemplated  closing  and  taking  possession  of  the  trust 
company,  hurried  off  to  the  capitol  and  other  places  to  bring 


428  ROMANCE  AND  TRAGEDY  OF  BANKING 

influence  to  bear  to  forestall  such  action.  In  this  way  it  became 
rumored  around  the  streets  of  Washington  that  the  United  States 
Trust  Company  was  in  trouble.  These  rumors  spread.  Christ- 
mas was  approaching.  The  company  held  a  large  amount  of 
Christmas  savings  funds.  The  rumors  reached  the  ears  of  this 
class  of  depositors  and  a  run  quickly  followed. 

The  company  operated  five  branches.  The  run  started  on 
the  Pennsylvania  Avenue  branch  and  soon  extended  to  all  the 
others  and  the  principal  office.  It  was  equivalent,  therefore,  to  a 
run  upon  six  banks  in  different  sections  of  the  city. 

The  legal  right  of  this  or  any  other  trust  company  organized 
under  authority  of  the  Act  of  Congress  approved  October  1,  1890, 
to  operate  branches  was  always  questioned  by  the  Comptroller's 
office.  This  act  did  not  specifically,  nor  by  implication,  confer 
such  authority,  and  the  rule  laid  down  by  the  courts  in  such  cases 
is  that  powers  not  specifically  granted  or  necessarily  incidental  to 
those  that  are  conferred  are  prohibited. 

The  attention  of  the  Department  of  Justice  was  called  to  this 
matter  at  one  time  and  an  opinion  requested,  but  the  Attorney 
General  declined  to  express  an  opinion,  stating  that  the  question 
was  one  for  the  Attorney  for  the  District  of  Columbia  to  deter- 
mine as  coming  within  his  jurisdiction. 

Notwithstanding  the  apparently  antagonistic  attitude  of  Mr. 
Williams  toward  the  examiner  at  the  beginning  of  the  irregular 
conference  in  regard  to  the  condition  of  the  trust  company,  a 
careful  analysis  of  the  slow,  doubtful  and  worthless  assets  listed 
by  the  examiner,  demonstrated  beyond  question  that  the  capital 
of  the  company  was  badly  impaired  and  that  it  was  otherwise  in 
a  very  precarious  condition.  As  the  directors  were  unable  to 
make  good  the  deficiency  or  to  make  any  immediate  arrangement 
to  meet  the  pressing  demands  of  the  depositors  that  were  then 
being  made  it  became  necessary  for  the  Comptroller  either  to 
close  and  take  possession  of  the  company  or  for  another  financial 
institution  to  take  over  its  assets  and  assume  its  deposit  liabilities. 
Accordingly  with  the  latter  object  in  view  negotiations  were  com- 
menced with  the  Munsey  Trust  Company,  of  which  Lancaster 
Williams  was  a  director,  and  the  Continental  Trust  Company,  of 
which  ex-Senator  Scott  was  president. 


ROMANCE  AND  TRAGEDY  OF  BANKING  429 

At  a  special  meeting  of  the  board  of  directors  of  the  United 
States  Trust  Company,  held  on  the  night  of  November  21,  a  reso- 
lution was  unanimously  adopted  requesting  the  Munsey  Trust 
Company  to  advance  to  the  United  States  Trust  Company  suffi- 
cient cash  to  meet  the  emergency  growing  out  of  the  run  upon 
the  latter  company  by  its  depositors  and  to  guarantee  the  pay- 
ment of  the  deposit  liabilities  of  the  company  in  full. 

In  consideration  of  compliance  with  this  request  by  the  Mun- 
sey Trust  Company  the  United  States  Trust  Company  agreed  to 
forthwith  assign  and  transfer  to  the  Munsey  Trust  Company 
all  of  its  assets,  including  cash,  securities,  real  estate  and  prop- 
erty of  every  kind  and  nature  as  security  for  such  advances  and 
guarantee,  with  full  authority  to  hold  and  to  realize  upon  the 
same  until  reimbursed  in  full,  including  cost  and  expenses,  for 
moneys  advanced  and  satisfactorily  indemnified  for  its  guarantee 
of  the  company's  deposit  liabilities. 

It  was  further  agreed  by  resolution  of  the  directors  of  the 
United  States  Trust  Compan}'  that  an  effort  would  be  made  to 
obtain  the  approval  of  the  stockholders  of  the  company  to  a 
resolution  authorizing  the  Munsey  Trust  Company  to  take  over 
and  liquidate  all  of  the  assets  of  the  United  States  Trust  Com- 
pany of  every  kind  and  description.  All  moneys  realized  from  the 
assets  over  and  above  the  liabilities  of  the  company,  plus  the  ex- 
penses of  liquidation  and  administration,  exclusive  of  the  services 
of  the  Munsey  Trust  Company,  to  be  paid  to  the  stockholders  of 
the  United  States  Trust  Company  in  stock  of  the  Munsey  Trust 
Company  at  its  then  book  value,  plus  interest,  or  in  cash  at  the 
stockholder's  option. 

During  the  early  morning  hours  of  November  22  the  officers  of 
the  national  banks  of  Washington  were  hurriedly  called  together 
and  informed  by  a  representative  of  the  Secretary  of  the  Treas- 
ury that  the  Treasury  Department  would  advance  $1,000,000 
to  the  national  banks  for  use  in  meeting  the  demands  of  the 
depositors  in  the  United  States  Trust  Company  if  each  national 
bank  would  assume  liability  for  its  proportionate  share  of  the 
deposit. 

This  money  could  not  lawfully  be  deposited  in  the  Munsey 
Trust  Company  as  the  law  permitted  such  deposits  to  be  made  in 


430 

national  banks  only.  But  upon  the  written  guaranty  of  the 
Munsey  Trust  Company  to  indemnify  them  against  loss  and  a 
deposit  by  the  company  of  collateral  with  the  Treasurer  of  the 
United  States,  consisting  of  selected  assets  of  the  United  States 
Trust  Company,  the  national  banks  assumed  their  proportionate 
share  of  the  liability  to  the  Treasury  Department  for  this  loan, 
and  the  money  was  deposited  directly  with  the  Munsey  Trust 
Company. 

All  deposits  in  the  United  States  Trust  Company  were  paid 
in  full  on  demand  by  the  Munsey  Trust  Company,  except  such  as 
were  voluntarily  transferred  to  and  continued  with  the  latter 
company. 

After  reimbursing  the  company  from  the  assets  of  the  United 
States  Trust  Company  for  the  amount  of  the  claims  paid  and 
retaining  sufficient  assets  to  cover  the  remaining  liabilities  as- 
sumed, the  Munsey  Trust  Company  turned  over  to  the  receiver 
of  the  United  States  Trust  Company,  appointed  by  the  court,  the 
remainder  of  the  assets. 

In  the  meantime  the  stockholders  of  the  United  States  Trust 
Company  adopted  a  resolution  placing  the  company  in  volun- 
tary liquidation  and  named  the  Commercial  National  Bank  of 
Washington  as  liquidating  agent. 

The  legality  of  this  action  was  not  recognized  by  the  Munsey 
Trust  Company  and  was  questioned  by  the  Comptroller  of  the 
Currency.  The  Act  of  Congress  under  which  the  United  States 
Trust  Company  was  organized  contained  no  provision  for  liquida- 
tion, consequently  the  company  had  to  be  liquidated  under  the 
laws  of  the  District  of  Columbia  covering  such  cases,  which  re- 
quired a  receiver  to  be  appointed  by  the  court.  A  receiver  was 
then  applied  for  and  appointed  by  the  court,  to  whom  these 
assets  were  turned  over  to  be  liquidated  for  the  benefit  of  the 
stockholders  of  the  United  States  Trust  Company. 

While  the  face  value  of  these  assets  amounted  to  about 
$800,000,  their  actual  value  was  problematical,  as  they  con- 
sisted largely  of  slow,  doubtful  and  worthless  paper,  the 
ultimate  liquidation  of  which  would  no  doubt  sustain  the  exam- 
iner's original  estimate  of  losses  thereon  sufficient  to  have  im- 
paired the  capital  of  the  company  at  least  seventy-five  per  cent. 


431 

The  whole  transaction  in  connection  with  the  deposit  in  the 
Munsev  Trust  Company  of  a  million  dollars  of  public  moneys 
taken  from  the  Treasury  of  the  United  States  may  be  briefly 
summed  up  as  follows: 

There  was  no  authority  of  law  whatever  for  the  deposit  of  this 
money  in  the  Munsey  Trust  Company. 

The  money  was  not  deposited  in  the  banks  and  by  the  banks 
loaned  to  the  trust  company,  but  the  banks  guaranteed  ths  liabil- 
ity of  the  trust  company  to  the  Treasury  Department  by  assum- 
ing responsibility  for  the  loan  and  in  doing  so  committed  an  ultra 
vires  act,  as  the  courts  had  held  time  and  again  that  it  was  beyond 
the  power  of  a  national  bank  to  guarantee  the  obligations  of  an- 
other party. 

The  money  was  deposited  in  the  Munsey  Trust  Company  on 
the  security  of  the  assets  of  the  United  States  Trust  Company 
and  not  upon  security  owned  and  deposited  by  the  banks,  but  the 
liability  was  assumed  by  the  banks  and  was  taken  upon  their 
books  constructively  as  crop-moving  funds. 

The  Munsey  Trust  Company  paid  the  loan  to  the  Treasury 
Department  in  full  by  installments  as  the  assets  of  the  United 
States  Trust  Company  were  liquidated. 

Immediately  following  the  subsidence  of  the  excitement  over 
the  failure  of  the  United  States  Trust  Company  Assistant  Secre- 
tary Williams  wrote  a  letter  to  the  Acting  Comptroller  of  the 
Currency,  stating  that  there  was  still  quite  a  little  comment  in 
Washington  on  the  action  of  the  Acting  Comptroller  in  calling  a 
meeting  of  the  presidents  of  some  of  the  national  banks  and  trust 
companies  and  discussing  with  them  the  condition  of  the  United 
States  Trust  Company  before  the  matter  was  taken  up  with  the 
directors  or  executive  committee  of  the  trust  company,  and  re- 
questing to  be  advised  of  the  exact  sequence  of  occurrences  which 
led  up  to  the  failure  of  the  company. 

The  Acting  Comptroller  replied  to  this  communication  in 
writing  under  date  of  December  12,  1913,  relating  in  detail  the 
history  and  condition  of  the  trust  company  from  the  date  of  its 
organization  to  the  date  of  its  failure  and  many  interesting  fea- 
tures in  the  career  of  some  of  the  managing  officers  of  the  com- 
pany who  were  responsible  for  wrecking  the  institution. 


432  ROMANCE  AND  TRAGEDY  OF  BANKING 

In   concluding   this    communication   the   Acting    Comptroller 
said: 

When  a  bank  in  the  hands  of  a  management  known  or 
believed  to  be  honest  and  competent  becomes  temporarily 
embarrassed,  the  best  interests  of  all  concerned  require 
that  every  proper  assistance  should  be  extended  to  the 
management  in  their  efforts  to  extricate  the  institution 
from  its  unsatisfactory  or  dangerous  condition,  and  restore 
it  to  a  state  of  solvency  and  safety.  This  always  has  been 
the  policy  of  the  Comptroller's  office.  But  when  a  bank 
is  in  the  control  of  a  management  believed  or  known  to  be 
hazardously  speculative,  whose  honesty  of  purpose,  sincerity 
or  ability  is  questioned,  whose  free  use  of  the  funds  and 
credits  of  the  bank  in  furtherance  of  their  individual 
reckless  ventures  has  brought  the  institution  to  a  condition 
bordering  on  insolvency,  such  a  management  is  entitled  to 
no  consideration  or  forbearance  and  the  sooner  the  doors 
of  their  institution  are  closed  the  better  for  its  depositors, 
stockholders  and  the  community  in  general.  To  temporize 
with  a  management  of  this  kind  is  simply  to  invite  disaster 
and  jeopardize  the  interests  of  depositors  and  minority 
stockholders  in  a  way  that  cannot  be  justified.  Such  was 
the  reputation  of  the  controlling  management  of  the  United 
States  Trust  Company  as  shown  by  the  reports  of  the  bank 
examiners  on  file  in  the  Comptroller's  office. 

There  was  nothing  new  or  novel  in  the  manner  in  which 
the  affairs  of  this  company  were  handled  by  the  Acting 
Comptroller  when  the  true  condition  of  the  concern  became 
known.  There  are  a  number  of  similar  situations  in  the 
records  of  the  Comptroller's  office,  the  most  notable  and 
recent  being  that  of  the  First-Second  National  Bank  of 
Pittsburgh.  Before  the  completion  of  the  examination  of 
that  bank  the  examiners  came  to  Washington  for  a  confer- 
ence as  to  its  condition.  The  president  of  another  national 
bank  in  Pittsburgh  was  sent  for  at  the  suggestion  of 
Assistant  Secretary  Williams  and  was  permitted  by  him  to 
go  over  the  assets  in  detail  with  the  examiners.  The 
examiners  then  returned  to  Pittsburgh  with  instructions  to 
confer  with  the  clearing  house  committee.  Several  con- 
ferences followed,  at  some  of  which  you  and  the  Acting 
Comptroller  were  present,  but  the  condition  of  the  bank 


ROMANCE  AND  TRAGEDY  OF  BANKING  433 

was  not  taken  up  with  the  board  of  directors  until  Sun- 
day morning,  the  day  before  its  doors  were  closed. 

The  two  cases  were  exactly  similar.  Each  had  a  serious 
impairment  of  capital,  which  the  directors  were  unable 
to  restore,  and  any  attempt  to  collect  an  assessment  from 
the  stockholders  would  have  resulted  in  the  closing  of  the 
bank.  No  complications  arose  in  the  Pittsburgh  case,  as 
the  bank  was  promptly  closed.  No  complications  would 
have  arisen  in  the  case  of  the  United  States  Trust  Company 
if  similar  action  had  been  taken. 

Whenever  a  bank  of  any  size  fails  the  examiner  and 
the  Comptroller's  office  are  invariably  severely  criticised  for 
not  doing  what  the  critics  think  should  have  been  done,  or 
for  doing  what  they  did  do.  The  case  of  the  United 
States  Trust  Company  is  no  exception  to  the  rule.  Such 
criticisms  as  were  made  of  the  Comptroller  and  the 
Examiner  in  this  matter  came  from  or  were  instigated  by, 
as  is  usually  the  case,  the  men  responsible  for  wrecking 
the  institution. 

If  any  criticism  of  the  Department  in  connection  with 
this  matter  is  justified,  it  is  for  permitting  this  company 
to  continue  doing  business  so  long  after  its  real  condition 
became  known. 

It  was  the  intention  of  the  Acting  Comptroller  to  close  and 
take  possession  of  the  United  States  Trust  Company  on  the  morn- 
ing following  the  day  on  which  the  run  on  the  institution  began. 
It  was  evident  that  the  run  would  continue  the  next  day  with 
increasing  severity.  The  assets  of  the  company  were  not  suf- 
ficiently liquid  to  enable  the  management  to  raise  the  funds  neces- 
sary to  meet  the  urgent  demands  of  the  depositors,  and  the  finan- 
cial strength  and  credit  of  the  directors  were  not  such  as  to  afford 
any  assurance  of  their  ability  to  meet  the  situation  otherwise. 
They  would  not  entertain  a  suggestion  to  close  the  bank  pending 
its  reorganization  or  absorption  by  another  institution,  so  the 
only  alternative  was  for  the  Comptroller  to  take  possession. 

As  in  the  case  of  the  Pittsburgh  bank,  the  bugaboo  of  a 
threatened  panic  was  again  called  into  service.  It  was  claimed 
that  the  closing  of  the  institution  by  the  Comptroller  would  pre- 
cipitate a  crisis  that  would  involve  every  bank  in  Washington. 


434 

The  Acting  Comptroller  did  not  share  in  this  apprehension.  He 
contended  that  the  only  banks  that  would  probably  be  affected 
by  the  failure  would  be  one  national  bank  and  a  savings  bank 
which  were  known  to  be  somewhat  involved  with  the  trust  com- 
pany. All  the  other  banks  and  trust  companies  in  Washington 
had  made  preparations  to  promptly  meet  any  demands  of  their 
depositors.  This  was  one  of  the  good  effects  of  the  conference 
with  the  bankers  before  the  failure,  as  it  enabled  the  banks  to 
prepare  for  the  emergency. 

The  unwarranted  and  extraordinary  proceeding  of  lending  to 
a  trust  company  a  million  dollars  from  the  Treasury  of  the 
United  States  for  the  purpose  of  paying  the  deposit  liabilities  of 
another  trust  company  did  not  occur  to  the  Acting  Comp- 
troller as  a  possible  means  of  saving  the  latter  institution,  as  such 
a  proceeding  had  no  precedent  in  the  annals  of  the  Comptroller's 
office  or  the  Treasury  Department. 

If  the  Acting  Comptroller  had  placed  the  United  States  Trust 
Company  in  the  hands  of  a  receiver  on  the  morning  of  November 
22,  1913,  as  he  would  have  done  had  it  not  been  for  the  interfer- 
ence of  his  official  superiors,  the  depositors  would  have  been  tem- 
porarily inconvenienced,  but  the  Treasury  Department  would  not 
have  been  subjected  to  the  severe  arraignment  that  was  heaped 
upon  it  because  of  Assistant  Secretary  Williams'  course,  the  inter- 
est of  the  minority  stockholders  would  have  been  better  subserved, 
and  those  who  were  responsible  for  wrecking  the  institution  would 
have  been  brought  to  justice. 

Many  of  the  stockholders  in  this  bank  bought  their  stock  at  a 
valuation  based  on  an  unimpaired  capital  of  $1,250,000  and  un- 
divided profits  of  over  $98,000.  At  the  date  of  failure  and  for 
some  months  previous  thereto  the  profit  account  was  entirely 
wiped  out  and  the  capital  was  impaired  at  least  seventy-five  per 
cent.,  according  to  the  examiner's  report.  The  disappearance  of 
this  large  sum  of  money  never  has  been  satisfactorily  accounted 
for  to  the  stockholders. 

When  the  Munsey  Trust  Company  paid  the  depositors  in  full 
and  satisfied  its  own  claims  against  the  United  States  Trust  Com- 
pany the  books  of  the  company  and  the  remaining  assets  were 
turned  over  to  Mr.  Tucker  K.  Sands,  the  receiver  of  the  company 


ROMANCE  AND  TRAGEDY  OF  BANKING  435 

appointed  by  the  court.  Mr.  Sands  was  vice-president  of  the 
Commercial  National  Bank  of  Washington,  D.  C.,  at  the  time  of 
his  appointment.  Eight  of  the  ten  directors  of  the  Commercial 
National  Bank  were  directors  of  the  United  States  Trust  Com- 
pany at  the  date  of  its  failure.  The  propriety  of  this  appoint- 
ment was,  therefore,  very  properly  questioned  as  it  placed  the 
final  liquidation  of  the  company  in  the  hands  or  under  the  influ- 
ence of  its  former  management. 

The  books  of  the  trust  company  showed  many  transactions 
and  manipulations  which  it  is  not  believed  would  have  stood  the 
test  of  a  judicial  investigation.  An  illustrative  case  was  submitted 
by  the  Comptroller  of  the  Currency  to  the  Department  of  Justice 
for  investigation  before  the  books  of  the  company  were  surren- 
dered by  the  Munsey  Trust  Company,  but  the  matter  was  disposed 
of  by  that  department  referring  it  to  the  United  States  Attorney 
for  the  District  of  Columbia  with  a  notification  to  the  Comptroller 
that  the  question  was  one  coming  under  the  supervision  of  the 
United  States  Attorney,  and  there  the  matter  ended. 

The  Miss  Lotta  Taylor  Episode 

In  April,  1913,  immediately  following  a  change  of  adminis- 
tration in  the  Treasury  Department  an  anonymous  communica- 
tion was  received  by  the  Secretary  of  the  Treasury  in  which  it 
was  charged,  among  other  things,  that  a  representative  of  the 
National  City  Bank  of  New  York  at  that  time  and  for  a  number 
of  years  prior  thereto  was  furnished  with  a  desk  in  the  office  of 
the  Comptroller  of  the  Currency  and  after  each  call  made  upon 
the  banks  for  a  report  of  their  condition  was  allowed  access  to 
such  reports  and  granted  the  special  privilege  of  compiling  con- 
fidential information  therefrom  for  the  use  of  the  National  City 
Bank. 

The  Acting  Comptroller  was  called  upon  for  a  report  as  to 
the  truth  or  falsity  of  these  charges  and  submitted  to  the  Secre- 
tary a  statement  in  detail  relative  thereto. 

The  sensational  press  despatches  and  newspaper  reports  sent 
out  from  Washington  at  the  time  in  regard  to  this  matter  were 
wholly  unwarranted  and  misleading.  They  unjustly  reflected 


436          ROMANCE  AND  TRAGEDY  OF  BANKING 

upon  the  administration  of  the  Comptroller's  office  and  subjected 
a  very  estimable  young  lady  to  undeserved  notoriety. 

The  facts  in  regard  to  this  matter  are  as  follows: 

Mr.  Charles  McL.  Taylor,  who  had  been  employed  in  the 
Comptroller's  office  for  a  good  many  years,  died  on  November  10, 
1903.  He  was  one  of  the  principal  clerks  in  the  bureau  and  a 
very  valuable  employee.  After  his  death  his  daughter,  Miss 
Lotta  M.  Taylor,  applied  to  the  Deputy  Comptroller  for  assist- 
ance in  securing  employment.  She  was  given  temporary  employ- 
ment in  the  Comptroller's  office  from  time  to  time  for  periods  not 
exceeding  thirty  days. 

When  these  employments  were  discontinued  the  Deputy 
Comptroller  recommended  her  for  employment  to  the  vice-presi- 
dent of  the  Riggs  National  Bank  of  Washington  in  connect-on 
with  the  redemption  of  circulation  of  correspondent  banks  for 
which  the  Riggs  National  Bank  was  the  authorized  agent.  She 
was  then  given  employment  of  this  nature. 

For  a  number  of  years,  as  far  back  as  1884,  the  United 
States  Investor  of  Boston,  Dun  &  Company  of  New  York  and 
one  or  two  other  concerns  employed,  with  the  approval  of  the 
Comptroller  of  the  Currency,  one  of  the  clerks  in  the  Comptrol- 
ler's office  to  compile  for  them,  five  times  a  year,  from  the  reports 
of  condition  of  national  banks  a  statement  showing  the  principal 
items  of  resources  and  liabilities,  such  as  capital,  surplus,  undi- 
vided profits,  loans  and  discounts,  deposits,  etc. 

A  representative  of  these  concerns  could  not  be  allowed  access 
to  these  reports,  so  the  Comptroller  authorized  an  employee  of 
the  office  to  compile  this  information  with  the  understanding  that 
the  work  should  be  done  entirely  outside  of  office  hours.  The  clerk 
was  compensated  for  his  services  by  the  parties  furnished  with  the 
information. 

This  work  was  carried  on  for  a  number  of  years  in  this  man- 
ner until  the  administration  of  Comptroller  Ridgely,  when  another 
employee  called  his  attention  to  the  fact  that  one  particular  clerk 
had  had  a  monopoly  of  this  special  privilege  for  several  years  and 
requested  to  be  allowed  to  do  part  of  the  work. 

This  request  led  to  a  discontinuance  of  the  work  entirely  by 
direction  of  Comptroller  Ridgely,  who  objected  to  any  employee 


ROMANCE  AND  TRAGEDY  OF  BANKING  437 

receiving  compensation  for  information  obtained  from  the  official 
records  of  the  bureau.  Mr.  Ridgely  did  not  object  to  the  particu- 
lar information  being  furnished,  but  did  not  think  it  was  proper 
for  an  employee  of  the  office  to  receive  compensation  therefor. 

Later  in  Comptroller  Ridgely's  administration  the  vice- 
president  of  the  Riggs  National  Bank  applied  to  the  Deputy 
Comptroller  for  authority  to  permit  Miss  Lotta  M.  Taylor  to 
compile  for  the  National  City  Bank  of  New  York  the  informa- 
tion above  referred  to  from  the  reports  of  condition  of  national 
banks  after  each  call. 

This  request  was  submitted  to  Mr.  Ridgely,  who  authorized 
the  work  to  be  done,  with  the  understanding  that  Miss  Taylor  was 
not  under  any  circumstances  to  handle  or  to  have  access  to  the 
reports  of  the  banks.  The  figures  she  obtained  were  to  be  taken 
from  the  abstract  sheets  after  the  clerks  were  through  with  them. 
The  charges  made  in  the  anonymous  communication  to  the 
Secretary  and  the  press  despatches  sent  out  from  Washington 
that  Miss  Taylor  was  allowed  access  to  the  reports  of  condition  of 
the  banks  and  copied  confidential  information  therefrom  for  the 
special  benefit  of  the  National  City  Bank  of  New  York  were 
wholly  unwarranted  and  unfounded. 

This  lady  did  not  have  access  to  or  handle  the  reports  of  the 
banks.  She  did  not  do  her  work  in  the  same  room  where  the  re- 
ports were  handled  and  filed.  She  had  no  regular  desk  assign- 
ment, but  moved  about  from  place  to  place  wherever  she  could 
find  a  vacant  desk.  The  information  she  obtained  was  in  no  sense 
of  a  confidential  nature.  It  was  information  such  as  the  law  re- 
quired every  national  bank  to  publish  in  a  newspaper  published  in 
the  city  or  town  of  its  location,  and  it  was  so  published  in  every 
case  for  at  least  a  week  or  ten  days  before  this  lady  had  access 
to  the  figures  in  Washington. 

There  was  no  disposition  on  the  part  of  the  Comptroller  or 
any  officer  of  the  bureau  to  extend  to  the  National  City  Bank  any 
special  privilege  or  facilities,  as  the  public  were  given  to  under- 
stand, or  to  furnish  that  bank  any  information  that  would  not 
have  been  given  to  any  other  bank  applying  therefor.  The  same 
information  could  have  been  obtained,  but  not  so  readily,  from 


438          ROMANCE  AND  TRAGEDY  OF  BANKING 

the  published  statements  of  the  banks  and  for  one  call  each  year 
from  the  annual  report  of  the  Comptroller  to  Congress. 

Writers  of  anonymous  letters  are  invariably  either  moral 
cowards  or  malicious  libelers,  and  the  proper  receptacle  for  such 
communications  is  the  official  waste  basket,  to  which  they  should 
be  consigned.  It  had  been  the  practice  of  the  department  to 
ignore  such  letters  altogether,  but  the  case  in  point,  for  some 
reason,  was  made  an  exception  to  this  rule. 

The  Federal  Reserve  Act 

On  August  29,  1913,  a  bill  was  introduced  in  the  House  of 
Representatives  by  Hon.  Carter  Glass  of  Virginia,  Chairman  of 
the  Banking  and  Currency  Committee,  to  provide  for  the  estab- 
lishment of  Federal  reserve  banks,  to  furnish  an  elastic  currency, 
to  afford  means  for  rediscounting  commercial  paper,  to  more 
effectively  supervise  banking  in  the  United  States,  and  for  other 
purposes. 

The  title  of  this  proposed  measure  was  The  Federal  Reserve 
Act.  It  created  a  Federal  Reserve  Board  composed  of  five  mem- 
bers to  be  appointed  by  the  President  of  the  United  States  and 
confirmed  by  the  Senate,  and  two  ex-officio  members — the  Secre- 
tary of  the  Treasury  and  the  Comptroller  of  the  Currency. 

A  Reserve  Bank  Organization  Committee  was  provided  for, 
to  be  composed  of  the  Secretary  of  the  Treasury,  the  Secretary 
of  Agriculture  and  the  Comptroller  of  the  Currency,  which  was 
authorized  to  designate  not  more  than  twelve  nor  less  than  eight 
cities  in  the  United  States  to  be  known  as  Federal  Reserve  cities, 
and  to  divide  the  continental  United  States  into  districts,  each 
district  to  embrace  one  of  the  Federal  Reserve  cities.  These  dis- 
tricts were  required  to  be  apportioned  with  due  regard  to  the 
convenience  and  customary  course  of  business. 

The  bill  required  every  national  banking  association  to  signify 
in  writing  to  the  Reserve  Bank  Organization  Committee,  within 
sixty  days  after  the  passage  of  this  act,  its  acceptance  of  the  pro- 
visions and  terms  of  the  act,  and  any  national  bank  failing  to  do 
so  should  cease  to  act  as  reserve  agent  for  other  banks  upon 


ROMANCE  AND  TRAGEDY  OF  BANKING  439 

thirty  days'  notice  to  be  given  by  the  Organization  Committee  or 
the  Federal  Reserve  Board. 

Any  national  bank  failing  to  become  a  member  of  this  system 
within  one  year  after  the  passage  of  the  act  forfeited  all  rights, 
privileges  and  franchises  under  the  national  banking  laws. 

The  privilege  of  becoming  a  member  was  also  extended  to 
State  banks  and  trust  companies. 

The  long  recommended  change  in  the  method  of  compen- 
sating bank  examiners  from  a  fee  to  a  salary  and  expense  basis 
was  provided  for  by  this  bill. 

A  Federal  Advisory  Council  was  authorized  to  consist  of  as 
many  members  as  there  were  Federal  Reserve  Districts,  each 
Federal  Reserve  Bank  by  its  board  of  directors  to  select  annual- 
ly a  representative  to  serve  on  the  council. 

Important  changes  were  made  in  the  laws  governing  reserve 
requirements  and  the  method  of  maintaining  reserve. 

Loans  by  member  banks  on  farm  lands  within  well-defined  limi- 
tations were  authorized,  as  well  as  the  establishment  of  foreign 
branches  by  banks  having  a  capital  and  surplus  of  $1,000,000. 

The  bill  was  favorably  reported  to  the  House  of  Representa- 
tives by  the  Banking  and  Currency  Committee  on  September  9, 
1913,  and  passed  the  House  September  18,  1913,  by  a  vote  of 
287  ayes  to  85  nays. 

The  bill  was  reported  to  the  Senate  on  the  same  day  that  it 
passed  the  House  of  Representatives  and  was  immediately  re- 
ferred to  the  Committee  on  Banking  and  Currency,  of  which 
Senator  Robert  L.  Owen  was  chairman,  where  it  remained  until 
December  19,  1913.  On  this  date  it  was  reported  favorably  to 
the  Senate,  passed  by  that  body  on  the  same  date,  and  was  re- 
ferred to  a  Conference  Committee  of  the  two  Houses  on  the  dis- 
agreeing amendments.  It  was  again  reported  to  the  respective 
Houses  by  the  Conference  Committee  on  December  22,  1913,  and 
finally  passed  the  House  of  Representatives  on  that  date  by  a  vote 
of  298  ayes  to  60  nays.  It  was  approved  by  the  President  on  the 
same  date  in  the  presence  of  a  number  of  Senators,  Representa- 
tives, department  officials,  newspaper  correspondents  and  others. 

This  bill  as  it  originally  passed  the  House  of  Representatives 
was  by  no  means  a  well  considered  measure.  It  contained  manv 


440          ROMANCE  AND  TRAGEDY  OF  BANKING 

glaring  defects  and  numerous  objectionable  features.  It  was 
hurried  through  the  House  under  restricted  debate  without  suf- 
ficient time  for  the  consideration  and  digestion  of  its  important 
provisions,  and  bore  every  evidence  of  hasty  legislation.  It  was 
under  consideration  in  committee  less  than  ten  days  and  passed 
the  House  in  nine  days  after  being  reported  from  the  committee. 

The  opposition  to  many  of  the  provisions  in  the  bill  as  it 
passed  the  House  was  so  strong  that  the  Senate  committee  very 
wisely  accorded  public  hearings  on  the  measure  to  a  number  of 
prominent  bankers  and  practically  redrafted  the  entire  bill. 

The  bill  was  intended,  as  the  report  of  the  Committee  stated, 
"to  bring  about  necessary  changes  in  the  banking  and  currency 
system  of  the  United  States  and  to  correct  long-standing  evils 
that  had  a  slow  and  deep-rooted  growth". 

It  aimed  to  rectify  defects  complained  of  in  the  national  bank- 
ing system,  although,  the  report  stated,  "it  did  not  seek  to  make 
all  the  innovations  that  might,  from  an  ideal  standpoint,  be 
deemed  desirable". 

In  comparing  this  measure  with  the  bill  reported  and  recom- 
mended by  the  National  Monetary  Commission  on  January  8, 
1912,  known  as  the  Aldrich  bill,  the  committee  stated  that  the 
Aldrich  bill  was  often  referred  to  "as  a  poisonous  theoretical  nov- 
elty," and  at  other  times  as  an  "ingenious  scheme  to  create  a 
central  bank  which  would  absorb  all  banking  functions  to  itself". 

It  was  claimed  for  the  Federal  Reserve  Act  that  such  panics 
and  commercial  crises  as  have  occurred  in  the  past  would  be  made 
mathematically  impossible  in  the  future  by  supplying  a  method 
for  the  banks  to  readily  obtain  a  circulation  medium  sufficiently 
elastic  to  meet  all  the  demands  of  industrial  or  commercial  activ- 
ities, by  providing  for  the  mobilization  of  reserves  in  the  several 
reserve  districts  and  their  .availability  not  only  for  the  business 
needs  of  the  respective  districts  but  for  the  legitimate  demands  of 
any  other  district,  and  by  furnishing  a  discount  system  which 
would  enable  every  well-managed  bank  to  quickly  convert  its 
assets  into  cash  to  meet  unexpected  contingencies  or  runs. 

The  framers  of  this  act  while  condemning  the  central  bank 
plan  apparently  recognized  the  principle  of  a  central  authority 


441 

with  limited  branches  as  the  correct  theory  of  a  banking  system, 
but  objected  to  a  central  bank  because  of  the  power  and  influence 
it  was  feared  such  an  institution  would  wield  in  the  political  and 
financial  affairs  of  this  country. 

This  act,  however,  created  a  central  authority  in  the  Federal 
Reserve  Board  with  far  more  power  than  was  ever  contemplated 
conferring  upon  a  central  bank  by  any  of  the  plans  proposed  for 
such  an  institution.  The  ultimate  success  or  failure  of  the  Fed- 
eral Reserve  Bank  System  will  depend  upon  the  conservatism, 
judiciousness  and  absolute  impartiality  with  which  this  power  is 
exercised  by  the  central  authority. 


JOHN  SKELTON  WILLIAMS 
Comptroller  of  the  Currency,  1914-1921 


CHAPTER  XVI 

Biography  of  John  Skelton  Williams 

JOHN  SKELTON  WILLIAMS,  the  thirteenth  Comptroller  of 
the  Currency,  was  born  in  Powhatan  County,  Virginia,  July 
6,  1865.  His  father,  John  Langbourne  Williams,  was  a  well- 
known  banker  of  Richmond.  After  receiving  a  private  school  edu- 
cation in  Richmond,  he  attended  the  University  of  Virginia.  He 
began  the  active  work  of  his  life  in  his  father's  office  at  the  age  of 
eighteen  years.  While  so  employed  he  attracted  attention  by  the 
publication  of  a  pamphlet  entitled  "A  Manual  of  Investments," 
which  became  so  popular  that  it  was  issued  yearly  for  some  time. 
He  became  a  partner  with  his  father  in  the  banking  and  brokerage 
business  and  later  engaged  actively  in  the  material  development 
of  the  South.  He  organized  and  consolidated  the  Seaboard  Air 
Line  and  was  elected  the  first  president  of  this  company  in  1900. 
He  also  served  as  president  of  other  railroad  companies  of  less 
mileage  and  was  president  of  the  Bank  of  Richmond  and  of  the 
Southern  Investment  Company.  He  was  director  of  several  other 
trust  companies,  banks  and  other  corporations,  and  was  recog- 
nized as  one  of  the  leading  financiers  of  the  South. 

Mr.  Williams  was  appointed  Assistant  Secretary  of  the  Treas- 
ury on  March  24,  1913,  and  was  placed  in  charge  of  the  fiscal 
bureaus  of  the  Treasury  Department.  He  remained  in  this  posi- 
tion until  his  appointment  and  qualification  as  Comptroller  of  the 
Currency.  The  statutory  period  of  Mr.  Williams'  appointment 
expired  February  2,  1919,  but  he  continued  to  discharge  the 
duties  of  the  office  until  March  2,  1921,  under  authority  of  the 
Act  of  Congress  approved  March  2,  1895  (28  Stat.,  808,  844), 
which  authorized  the  continuance  in  office  of  all  officers  under  the 
Treasury  Department  after  the  date  of  the  expiration  of  their 
statutory  terms  pending  the  appointment  and  qualification  of 
their  successors,  and  also  waived  the  requirement  for  a  new  bond 
during  the  continuing  period  in  the  discretion  of  the  Secretary 
of  the  Treasury. 


444  ROMANCE  AND  TRAGEDY  OF  BANKING 

Considerable  opposition  was  made  to  Mr.  Williams'  confirma- 
tion as  Comptroller,  and  charges  were  filed  against  him  with  the 
Committee  on  Banking  and  Currency  of  the  United  States  Senate 
in  connection  with  the  absorption  of  the  United  States  Trust 
Company  by  the  Munsey  Trust  Company  and  the  deposit  in  the 
latter  company  of  one  million  dollars  of  public  moneys  taken 
from  the  Treasury  of  the  United  States,  as  explained  in  the  fore- 
going chapter.  These  charges  were  investigated  by  the  commit- 
tee. Testimony  was  taken  and  reported  stenographically.  The 
report  may  be  found  in  a  pamphlet  entitled  "Confidential  Hear- 
ings before  the  Committee  on  Banking  and  Currency,  United 
States  Senate,"  sixty-third  Congress,  Second  Session,  January 
14,  1914. 

As  a  member  of  the  Federal  Reserve  Board  Organization  Com- 
mittee, Mr.  Williams  took  an  active  part  in  the  formation  of  the 
Federal  Reserve  Districts  and  other  work  incidental  to  the  inaugu- 
ration of  the  new  banking  system. 

The  administration  of  Mr.  Williams  was  distinguished  at  the 
outset  by  a  rigid  enforcement  of  the  banking  laws,  and  much 
good  was  accomplished  by  him  in  compelling  the  banks  to  observe 
the  law  and  to  respect  the  requirements  of  the  Comptroller's 
office.  His  official  career  in  the  Treasury  Department  was  more 
or  less  turbulent  from  the  beginning,  and  his  administration  of 
the  Currency  Bureau  was  considered  by  many  of  the  banks  the 
most  radical  and  exacting  of  any  in  its  history.  Before  his  ap- 
pointment to  official  position  in  the  Treasury  he  had  the  reputa- 
tion of  being  a  man  of  strong  impulses  and  prejudices,  courageous, 
blunt  and  outspoken,  unwilling  to  accept  advice  or  suggestion, 
lacking  in  suavity,  but  entirely  devoid  of  subtlety,  and  relentless 
toward  those  with  whom  he  had  business  or  personal  differences. 

These  characteristics  were  strongly  manifested  in  his  official 
intercourse  and  dealings  with  some  of  the  banks  and  throughout 
his  administration  of  the  Comptroller's  office. 

Unlike  his  immediate  predecessor  whose  oft  declared  policy 
was  to  "always  pursue  the  course  of  least  resistance,"  Mr.  Wil- 
liams never  hesitated  to  pursue  the  course  of  most  resistance  when 
he  deemed  it  necessary  to  accomplish  what  he  believed  to  be  right 
or  to  secure  the  correction  of  what  he  believed  to  be  wrong.  He 


ROMANCE  AND  TRAGEDY  OF  BANKING  445 

never  compromised  with  what  he  considered  to  be  wrong  to  avoid 
contention  or  resistance,  no  matter  how  formidable,  or  criticism, 
however  severe. 

It  was  not  so  much  what  Mr.  Williams  did  when  he  was  Comp- 
troller that  subjected  him  to  so  much  criticism  and  made  his 
administration  so  unpopular  as  it  was  the  manner  in  which  he  did 
it.  Another  Comptroller  might  have  done  the  very  same  things 
or  followed  the  same  line  of  policy  without  arousing  the  antag- 
onism that  he  did  by  pursuing  a  more  tactful  course.  But  tact- 
fulness  was  not  one  of  Mr.  Williams'  cardinal  virtues. 

Mr.  Williams  was  a  man  of  very  warm  friendships  and  of 
many  excellent  qualities  of  head  and  heart,  generous,  of  recog- 
nized ability,  and  of  unimpeachable  integrity  and  honesty.  Apart 
from  his  controversial  characteristics  it  must  be  conceded,  even 
by  his  critics,  that  he  was  one  of  the  ablest  officials,  and  without 
doubt  the  most  forceful  Comptroller  of  the  Currency  who  ever 
occupied  the  office. 

Aldrich-V  re  eland  Emergency  Currency  Law 

On  January  1,  1914,  twenty-one  national  currency  associa- 
tions had  been  formed  in  different  sections  of  the  country  under 
authority  of  the  Act  of  May  33,  1908,  known  as  the  Aldrich- 
Vreeland  emergency  currency  law,  but  no  application  for  the  addi- 
tional currency  provided  for  by  this  act  had  been  received  from 
or  currency  issued  to  any  of  these  associations,  although  periods 
of  money  stringency  had  existed  in  sections  of  the  country  which 
would  seem  to  have  made  an  issue  of  this  currency  desirable.  The 
high  rate  of  interest  charged  on  this  currency  probably  deterred 
banks  from  taking  it  out.  An  occasional  application  was  re- 
ceived from  individual  banks  for  additional  circulation  authorized 
by  Section  t3  of  this  act,  but  none  was  issued,  and  no  so-called 
emergency  currency  was  issued  to  any  association  or  bank  until 
after  the  outbreak  of  the  war  in  Europe,  which  created  a  condi- 
tion of  affairs  in  this  country  threatening  a  serious  business  and 
financial  crisis. 

Immediately  preceding  the  declaration  of  war  the  resources 
of  the  banks  in  New  York  City  had  been  heavily  drawn  upon  to 


446          ROMANCE  AND  TRAGEDY  OP  BANKING 

meet  the  demands  incident  to  large  expectations  of  gold  to 
Europe  and  sales  on  the  New  York  Stock  Exchange  of  enormous 
amounts  of  American  securities  for  foreign  account.  Further 
shipments  of  gold  and  sales  of  securities  were  anticipated.  To 
prevent  a  general  demoralization  of  the  market  the  stock  ex- 
change was  closed  on  the  morning  of  July  31,  1914,  and  remained 
closed  until  December  12  following,  when  trading  in  stocks  was 
resumed  under  certain  restrictions  prescribed  by  the  special  com- 
mittee of  the  stock  exchange. 

The  New  York  Clearing  House  statement  for  August  1,  1914, 
showed  that  the  reserves  of  the  New  York  banks  had  been  reduced 
$43,599,500  below  the  amount  held  the  preceding  week  and  that 
the  deficiency  in  reserves  amounted  to  $17,425,750.  In  May, 
June  and  July  nearly  $100,000,000  of  gold  had  been  exported  to 
Europe.  To  meet  further  maturing  obligations  in  Europe,  for 
which  payment  in  gold  was  demanded,  J.  P.  Morgan  &  Company 
organized  a  million-dollar  syndicate,  and  later  another  syndicate 
was  organized,  called  the  Gold  Fund  Pool,  to  take  care  of  the 
foreign  exchange  market. 

At  this  juncture  the  Aldrich-Vreeland  emergency  currency 
measure  proved  of  great  aid  to  the  financiers  and  bankers.  Al- 
though this  law  had  been  in  existence  since  immediately  following 
the  panic  of  1907,  it  had  never  been  utilized  and  probably  never 
would  have  been  had  it  not  been  for  the  grave  emergency  created 
by  the  European  war. 

The  Secretary  of  the  Treasury  realized  the  gravity  of  the 
situation,  and  on  August  3  announced  through  the  press  that  the 
Treasury  Department  was  prepared  to  immediately  issue  to  na- 
tional banks  in  New  York  City  $100,000,000  of  additional  cur- 
rency authorized  by  this  act. 

To  facilitate  the  issuance  of  emergency  currency,  Congress, 
under  date  of  August  4,  1914,  amended  the  Act  of  May  30,  1908, 
authorizing  the  Secretary  of  the  Treasury,  in  his  discretion,  to 
waive  the  provision  in  the  original  act,  restricting  the  issuance 
of  additional  currency  to  national  banks  which  had  outstanding 
bond  secured  circulation  equal  to  forty  per  cent,  of  their  capital 
stock.  The  act  was  further  amended  to  increase  the  amount  of 
currency  which  a  bank  was  authorized  to  issue  from  one  hundred 


ROMANCE  AND  TRAGEDY  OF  BANKING  447 

per  cent,  of  capital  and  surplus  to  one  hundred  and  twenty-five 
per  cent,  of  capital  and  surplus,  and  repealed  the  provision  limit- 
ing the  total  issue  of  such  currency  to  $500,000,000. 

Immediately  following  these  amendments  to  the  law  additional 
currency  associations  were  rapidly  formed  in  different  sections 
of  the  country.  On  October  1,  1914,  forty-four  of  these  associa- 
tions had  been  organized,  covering  nearly  every  State.  The  num- 
ber of  national  banks  composing  these  associations  aggregated 
2102  and  their  capital  stock  and  surplus  amounted  to  $1,197,- 
771,000.  The  total  amount  of  emergency  currency  issued  ag- 
gregated $382,502,645. 

The  situation  was  further  relieved  by  the  New  York  Clearing 
House  Association  which,  on  August  3,  1914,  commenced  the 
issuance  of  clearing-house  loan  certificates.  Between  August  3  and 
October  15  following,  $124,695,000  of  these  certificates  were 
issued.  The  last  of  these  certificates  were  cancelled  on  November 
28,  1914,  and  on  July  8,  1915,  the  entire  Emergency  Cur- 
rency issues  had  been  retired,  except  $171,703.11  issued  to  the 
First  National  Bank  of  Uniontown,  Pa.,  which  had  failed  and  had 
been  placed  in  the  hands  of  a  receiver  January  18,  1915.  After 
that  date  this  emergency  currency  was  provided  for  by  the  de- 
posit of  lawful  money. 

The  Clearing  House  Associations  in  Chicago,  St.  Louis  and 
other  large  cities  also  issued  clearing-house  certificates,  but  by 
December  1,  1914,  all  such  certificates  had  been  paid  or  were 
called  in  for  redemption. 

The  Kiggs  National  Bank  Controversy 

At  the  time  of  the  investigation  by  the  Senate  Committee  on 
Banking  and  Currency  of  the  charges  preferred  against  Mr. 
Williams  in  opposition  to  his  confirmation  as  Comptroller  of  the 
Currency,  Milton  E.  Ailes,  vice-president  of  the  Riggs  National 
Bank  of  Washington,  testified  before  the  committee  that  Mr. 
Williams  was  particularly  hostile  and  vindictive  towards  him  be- 
cause of  his  connections  with  the  National  City  Bank  of  New 
York  and  the  Seaboard  Air  Line,  he  having  succeeded  Mr.  Wil- 
liams on  the  board  of  directors  of  the  railroad  company. 


448  ROMANCE  AND  TRAGEDY  OF  BANKING 

Mr.  Ailes  charged  that  Mr.  Williams,  while  Assistant  Secre- 
tary of  the  Treasury,  resorted  to  extraordinary  methods  to 
obtain  information  with  which  to  attack  the  National  City  Bank 
of  New  York,  and  that  in  furtherance  of  this  purpose  had  in- 
structed national  bank  examiners  to  search  the  confidential  files 
of  certain  banks  in  Richmond,  Va.,  and  Chattanooga,  Tenn.,  to 
see  if  he  could  find  any  evidence  of  an  incriminating  nature  against 
the  National  City  Bank  and  the  Riggs  National  Bank  or  any  of 
their  officers,  and  that  these  examiners  abstracted  from  the  files 
of  these  banks  original  confidential  papers  and  brought  them  to 
Washington. 

He  charged  further  that  the  national  bank  examiners  for  New 
York  City  in  examining  some  of  the  banks  singled  out  Seaboard 
Air  Line  loans  and  instructed  the  banks  to  dispose  of  them,  inti- 
mating that  this  action  on  the  part  of  the  examiner  was  taken  by 
direction  of  Mr.  Williams. 

Mr.  Ailes  also  reverted  to  the  Miss  Taylor  incident,  herein- 
before referred  to,  and  charged  that  the  manner  in  which  Mr, 
Williams  conducted  the  investigation  of  that  matter  was  another 
evidence  of  his  hostility  to  him  and  the  National  City  Bank. 

As  is  usual  in  investigations  by  a  Congressional  Committee, 
the  rules  of  evidence  were  not  strictly  adhered  to  in  taking  testi- 
mony, consequently  a  good  deal  of  extraneous  and  irrelevant 
testimony,  hearsay  and  innuendo  were  introduced. 

The  effect  of  the  whole  proceeding  was  simply  to  consume 
time,  delay  the  confirmation  of  Mr.  Williams  and  intensify  the 
strained  relations  existing  between  him  and  some  of  the  managing 
officers  of  the  Riggs  National  Bank,  as  subsequent  events  fully 
verified. 

In  his  first  annual  report  to  Congress  in  1914,  Mr.  Williams 
referred  to  an  article  published  in  the  New  York  Tribune  on 
December  10,  1913,  in  which  an  attack  was  made  upon  him  and 
the  Treasury  Department  in  connection  with  the  use  of  Treasury 
funds  to  avoid  the  failure  of  the  United  States  Trust  Company. 
He  charged  the  newspaper  with  being  hostile  to  the  administra- 
tion and  that  the  article  in  question  was  "instigated  and  pro- 
moted by  individuals  connected  with  a  local  national  bank  which 
was  affiliated  with  a  banking  interest  in  New  York  City,  also 


ROMANCE  AND  TRAGEDY  OF  BANKING  449 

hostile  to  the  administration,  and  which  under  the  previous  admin- 
istration had  enjoyed  special  favors  and  privileges  from  the  Gov- 
ernment, particularly  in  connection  with  the  Treasury  Depart- 
ment". 

While  the  names  of  the  particular  banks  to  which  he  had  ref- 
erence were  not  mentioned,  it  was  clearly  understood  that  they 
were  the  National  City  Bank  of  New  York  and  the  Riggs  National 
Bank  of  Washington. 

He  stated  that  the  charges  embraced  in  this  newspaper  attack 
were  investigated  by  the  Banking  and  Currency  Committee  of  the 
United  States  Senate  and  were  found  to  be  false,  unprovoked  and 
without  the  slightest  justification  or  excuse,  and  that  while  he  had 
been  the  special  object  of  attack  by  the  newspaper  and  banking 
interests  referred  to,  his  nomination  to  be  Comptroller  of  the  Cur- 
rency was  confirmed  by  the  United  States  Senate  on  January  19, 
1914,  with  but  one  dissenting  vote,  and  that  this  dissenting  vote 
was  from  a  member  of  the  opposite  political  party,  who  stated 
that  his  objection  was  entirely  impersonal  and  was  based  upon 
economical  issues. 

Almost  immediately  following  the  assumption  by  Mr.  Williams 
of  the  duties  of  Comptroller  the  Riggs  National  Bank  became  the 
object  of  his  special  attention.  An  examination  of  this  bank  was 
commenced  by  national  bank  examiners  and  continued  without 
interruption  for  the  period  of  almost  one  year.  Every  trans- 
action of  the  bank  in  connection  with  loans  and  investments  from 
the  date  of  its  organization  in  1896  to  the  date  of  the  examination 
was  exhaustively  investigated  and  expensive  legal  counsel  was 
employed  to  assist  the  examiner  in  interrogating  the  officers  of  the 
bank  under  oath.  Numerous  special  statements  and  sworn  re- 
ports were  called  for  by  Mr.  Williams,  and  finally  he  called  for  a 
sworn  statement  showing  all  loans  made  to  officers  of  the  bank 
since  the  date  of  its  organization  in  1896,  and  the  interest  paid 
on  such  loans,  and  all  loans  made  to  any  member  of  an  officer's 
family.  This  information  was  required  to  be  furnished  within 
one  week. 

Section  5213  U.  S.  R.  S.  provides  that  every  national  bank 
which  fails  to  make  and  transmit  within  the  time  specified  any 
report  required  by  the  Comptroller  of  the  Currency  under 


450          ROMANCE  AND  TRAGEDY  OF  BANKING 

authority  of  Sections  5211  and  5212  of  the  Revised  Statutes  shall 
be  subject  to  a  fine  of  one  hundred  dollars  a  day,  and  if  any  bank 
delays  or  refuses  to  pay  the  penalty  imposed  after  it  has  been 
assessed  by  the  Comptroller,  the  amount  of  the  penalty  may  be 
retained  by  the  Treasurer  of  the  United  States,  upon  the  order  of 
the  Comptroller,  out  of  the  interest,  as  it  may  become  due  to  the 
bank  on  its  bonds  deposited  with  the  Treasurer  to  secure  circula- 
tion, and  that  all  such  sums  so  collected  shall  be  covered  into  the 
Treasury  of  the  United  States. 

Under  date  of  March  9,  1915,  the  Riggs  National  Bank  ad- 
dressed a  communication  to  the  Comptroller,  acknowledging  re- 
ceipt of  one  of  his  letters,  and  stating  that  during  the  previous 
nine  months  the  bank  had  received  more  than  forty  letters  from 
the  Comptroller,  every  one  of  which  contained  insulting  imputa- 
tions or  insinuations  against  the  integrity  or  veracity  of  some  of 
its  officers.  Much  of  the  information  requested,  it  was  stated,  the 
Comptroller  had  no  right  under  the  law  to  call  for  and  the  bank 
could  very  properly  have  refused  to  comply  with  his  demands. 
But  his  communications  were  answered  in  the  expectation  that 
when  he  was  fully  advised  in  regard  to  the  affairs  of  the  bank  and 
the  conduct  of  its  officers,  his  sense  of  official  obligations  would 
prevail  over  his  personal  feelings  and  restrain  him  from  abusing 
the  power  of  his  great  office  to  gratify  his  personal  resentment. 
His  last  letter,  however,  it  was  stated,  had  made  it  manifest  that 
the  forbearance  of  the  bank's  officers  had  only  invited  more  per- 
sistent attack,  and,  therefore,  they  were  convinced  that  the  Comp- 
troller was  actuated  in  his  course  only  by  personal  hostility 
toward  some  of  the  bank's  officers. 

On  March  30,  1915,  the  Comptroller  notified  the  bank  that 
for  failure  to  make  and  transmit  the  special  reports  called  for 
within  the  time  prescribed,  or  within  five  days  thereafter,  an 
assessment  of  one  hundred  dollars  a  day  was  imposed  for  each 
day  from  February  8  to  March  30,  1915,  amounting  to  five  thou- 
sand dollars,  which  the  bank  was  directed  to  pay.  At  the  same 
time  the  Treasurer  of  the  United  States  was  instructed  to  with- 
hold any  interest  due  or  to  become  due  on  the  bonds  belonging  to 
the  bank  on  deposit  as  security  for  circulation. 


ROMANCE  AND  TRAGEDY  OF  BANKING  451 

In  a  letter  addressed  to  the  Treasurer  of  the  United  States, 
dated  April  1,  1915,  the  bank  denied  the  legal  right  or  authority 
of  the  Comptroller  to  assess  the  penalty  imposed  and  demanded 
payment  to  the  bank  of  the  interest  due  on  bonds  deposited  as  of 
April  1,  1915.  But  if  the  Treasurer,  under  the  circumstances, 
did  not  feel  that  he  could  comply  with  this  demand,  he  was  re- 
quested to  hold  the  matter  in  abeyance  until  the  bank  had  an 
opportunity  to  be  heard  or  to  take  such  legal  action  as  was 
necessary  to  protect  its  rights. 

On  April  12,  1915,  the  bank  filed  a  bill  of  complaint  in  the 
Supreme  Court  of  the  District  of  Columbia  asking  for  protection 
from  persecution  and  oppression  by  officials  of  the  Treasury  De- 
partment, and  on  this  petition  the  Court  granted  a  temporary 
order  restraining  the  Secretary  of  the  Treasury,  the  Comptroller 
of  the  Currency  and  the  Treasurer  of  the  United  States  from  pay- 
ing into  the  United  States  Treasury  the  whole  or  any  part  of  the 
retained  interest  money  due  or  to  become  due  and  payable  April 
1  and  assessed  as  a  penalty  against  the  bank. 

This  order  also  restrained  the  Comptroller  from  revoking  the 
bank's  designation  as  a  depository  of  other  national  banks  or 
from  refusing  to  approve  applications  for  such  designations. 

The  court  also  issued  a  rule  directing  the  officials  mentioned 
to  show  cause  on  or  before  the  sixteenth  day  of  April  following 
why  they  should  not  be  permanently  enjoined  from  interfering 
with  the  bank  in  any  manner  whatever. 

In  the  bill  of  complaint  filed  by  the  bank  it  was  averred  that 
at  the  time  the  nomination  of  Mr.  Williams  was  under  considera- 
tion by  the  Senate  Committee  Mr.  Williams  was  interrogated  as 
to  whether  if  appointed  Comptroller  of  the  Currency  he  would 
discharge  the  duties  of  his  office  fairly  and  impartially  notwith- 
standing his  apparent  hostility  toward  certain  officers  of  the 
Riggs  bank,  and  that  it  was  only  after  an  affirmative  answer  to 
such  interrogatories  that  the  Committee  consented  to  report 
favorably  upon  his  nomination. 

The  bank  further  averred  that  Mr.  Williams  caused  the  with- 
drawal of  $1,158,479.51  of  Panama  funds  from  the  bank  and  that 
he  and  the  Secretary  of  the  Treasury  conspired  to  take  away  and 
did  effect  the  withdrawal  of  nearly  $2,500,000  at  a  time  when  the 


452  ROMANCE  AND  TRAGEDY  OF  BANKING 

banks  in  the  United  States  were  making  strenuous  efforts  to  hus- 
band their  resources,  and  at  a  time  when  the  Riggs  National 
Bank  could  not  dispose  of  the  bonds  it  had  pledged  as  security  for 
this  money  because  of  the  European  war. 

The  complaint  charged  further  that  Mr.  Williams  had  ma- 
liciously used  his  high  office  as  a  cover  to  impertinently,  arrogant- 
ly and  insolently  pry  into  matters  with  which  he  had  no  official 
concern  whatever,  for  the  purpose  and  with  the  intent  to  injure 
the  bank  and  wreak  his  vengeance  on  certain  of  its  officers  against 
whom  he  entertained  a  personal  hatred. 

To  supply  the  information  called  for  as  to  loans  to  officers 
and  their  families  and  the  interest  paid  on  such  loans,  which  the 
Comptroller  required  to  be  furnished  within  one  week,  the  petition 
averred,  would  require  an  examination  of  the  bank's  records  cov- 
ering a  period  of  eighteen  years,  and  would  cause  such  a  serious 
loss  of  time  and  interference  with  its  current  business  that  the 
officers  felt  justified  in  refusing  to  comply  with  this  demand  upon 
the  ground  that  it  was  unreasonable. 

It  was  further  averred  that  under  date  of  March  19,  1915, 
Mr.  Williams  wrote  the  bank  a  long,  rambling,  insulting  and  argu- 
mentative letter  concerning  certain  loans  made  during  the  previ- 
ous five  years,  and  demanded  a  report  in  response  within  one 
week.  The  language  of  this  letter,  it  was  stated,  was  intemperate, 
arrogant,  insolent  and  libelous  in  the  extreme  and  indicated  a 
mind  utterly  blind  to  the  duties  and  dignities  of  the  office  of  Comp- 
troller of  the  Currency,  and  a  recklessness  and  impatience  of 
all  legal  restraints,  arising  either  from  uncontrollable  hatred, 
temper  or  from  a  graver  cause. 

Five  days  were  consumed  by  counsel  in  argument,  during 
which  personalities  were  freely  indulged  in.  The  court  then 
announced  that  the  motion  made  by  the  Government  to  dis- 
miss the  case  would  be  taken  under  advisement,  at  the  same  time 
denying  the  prayer  of  the  bank  for  continuance  of  the  injunction 
pending  litigation. 

Without  considering,  the  court  said,  what  evidence  might  here- 
after be  presented,  there  was  nothing  in  the  record  as  made  up 
which  showed  that  the  officials  of  the  Government  had  exercised 


ROMANCE  AND  TRAGEDY  OF  BANKING  453 

arbitrary  powers  in  refusing  to  approve  the  Riggs  National  Bank 
as  a  reserve  agent  for  other  national  banks. 

The  court  expressed  the  opinion  that  the  officials  of  the  Gov- 
ernment would  have  been  remiss  in  their  duty  had  they  done 
otherwise,  as  the  evidence  presented  showed  persistent  violations 
of  law  on  the  part  of  the  Riggs  bank,  which  began  before  Mr. 
Williams  came  into  office  and  continued  for  some  time  thereafter. 

The  court  was  correct  in  the  opinion  thus  expressed,  both  as 
to  the  duty  of  the  officials  and  as  to  the  disregard  of  the  law  by 
the  bank.  But  if  this  policy  had  been  impartially  and  rigorously 
applied  to  all  national  banks  shown  by  examiners'  reports  to  have 
persistently  violated  the  law  "before  Mr.  Williams  came  into  office 
and  for  some  time  thereafter,"  as  in  the  case  of  the  Riggs  National 
Bank,  there  would  have  been  very  few  banks  approved  as  reserve 
agents  for  other  banks,  or  continued  as  reserve  agents  after 
approval,  as  a  large  number  of  such  banks  were  as  persistent 
violators  of  the  law  as  the  Riggs  National  Bank,  if  not  more  so. 

The  court  expressed  the  further  opinion  that  the  policy  of 
not  designating  as  reserve  agents  stock  exchange  banks  as  com- 
pared with  commercial  banks,  was  sound  and  commendable,  and 
was  recognized  by  Congress  in  framing  the  Federal  Reserve  Act. 

The  court  denied  all  of  the  prayers  of  the  plaintiffs  in  their 
bill  of  complaint,  except  the  one  asking  that  the  Treasurer  of  the 
United  States  be  enjoined  from  converting  into  the  Treasury  the 
five  thousand  dollars  interest  due  on  the  bonds  of  the  bank  on  de- 
posit as  security  for  circulation,  which  had  been  retained  upon  the 
order  of  the  Comptroller  of  the  Currency  to  pay  the  penalty  im- 
posed by  him  upon  the  bank  for  neglect  or  refusal  to  make  and 
transmit  the  special  reports  called  for. 

In  regard  to  this  the  court  said  a  temporary  restraining  order 
had  been  granted  because  the  contention  had  been  raised  that  if 
this  money  was  unlawfully  covered  into  the  Treasury  it  might 
require  an  Act  of  Congress  to  get  it  out,  which  would  occasion 
considerable  delay. 

The  court  declared  that  the  only  question  at  issue  in  this  case 
was  as  to  the  power  of  the  Comptroller  of  the  Currency  to  assess 
the  penalty  imposed,  and  this  question  would  be  taken  under  ad- 
visement and  a  decision  rendered  by  the  first  of  July  following. 


454          ROMANCE  AND  TRAGEDY  OF  BANKING 

Although  this  case  was  taken  under  advisement  by  the  court 
May  21,  1915,  a  decision  was  not  rendered  until  May  31,  1916,  a 
year  and  ten  days  thereafter.  It  was  then  ordered  that  the  tem- 
porary injunction  restraining  the  payment  into  the  Treasury  of 
the  United  States  of  the  $5,000  due  the  bank  as  interest  on  its 
bonds  on  deposit  as  security  for  circulation,  be  permanently 
continued. 

The  decision  concludes  as  follows : 

Except  for  the  purpose  of  compelling  payment  of  the 
interest  due  the  bank  and  retained,  and  of  enjoying  the 
assessment  of  penalties  because  of  the  failure  to  comply 
with  the  demands  for  the  reports  the  bill  will  be  dismissed 
as  to  all  the  defendants. 

It  was  contended  by  counsel  for  the  plaintiff  in  the  argument 
•of  this  case  that  the  Comptroller  of  the  Currency  had  no  author- 
ity to  impose  upon  the  bank  the  penalty  of  one  hundred  dollars  a 
day  prescribed  by  Section  5213  of  the  Revised  Statutes  for  fail- 
ure to  make  and  transmit  within  five  days  the  special  reports 
called  for.  It  was  held  by  counsel  that  this  penalty  was  appli- 
cable only  as  against  failure  to  make  and  transmit  what  are  known 
as  reports  of  condition,  containing  a  statement  of  the  resources 
and  liabilities  of  the  bank,  sworn  to  by  the  president  or  cashier 
and  attested  by  at  least  three  of  the  directors,  which  the  banks 
are  required  by  law  to  make  not  less  than  five  times  a  year  on  call 
of  the  Comptroller. 

In  defining  the  Comptroller's  powers  in  regard  to  requiring 
reports  from  the  banks  the  court  expressed  the  opinion  that 
with  the  exception  of  Section  5240  of  the  Revised  Statutes  the 
most  suggestive  provisions  of  the  national  banking  laws  to  aid  in 
the  interpretation  of  Section  5211,  under  authority  of  which  the 
Comptroller  claimed  the  right  to  call  for  the  special  reports  in 
connection  with  which  the  five-thousand-dollar  penalty  was  im- 
posed, were  to  be  found  in  Section  5169  of  the  Revised  Statutes, 
which  the  court  stated  practically  defines  the  word  "condition"  to 
mean  every  fact  relating  to  a  bank  including  those  showing  an 
intention  to  use  the  association  for  any  other  than  the  legitimate 
objects  contemplated  by  the  national  bank  act. 


KOMANCE  AND  TRAGEDY  OF  BANKING  455 

The  court  then  referred  to  Section  3  of  Chapter  290,  Act  of 
July  12,  1882,  relating  to  the  extension  of  the  corporate  existence 
of  national  banks  and  expressed  the  opinion  that  the  exam  nation 
authorized  by  this  section  contemplated  the  same  kind  and  scope 
of  an  examination  as  that  provided  for  in  Section  5169  relating  to 
the  organization  of  banks. 

It  is  significant  that  the  court  should  have  deemed  it  neces- 
sary in  determining  this  case  to  have  referred  to  the  section  of 
the  law  governing  the  extension  of  the  corporate  existence  of  a 
bank  and  interpret  its  meaning  at  the  very  time  the  application 
of  the  Riggs  National  Bank  for  extension  of  its  corporate  exist- 
ence was  under  consideration  by  the  Comptroller  of  the  Currency 
and  Mr.  Williams  was  seeking  legal  advice  as  to  whether  he  could 
lawfully  refuse  to  extend  the  bank's  charter  because  of  his  pro- 
nounced and  uncompromising  objection  to  the  management. 

Section  3  of  the  Act  of  July  12,  1882,  relating  to  the  exten- 
sion of  charters  of  national  banks  reads  as  follows: 

That  upon  the  receipt  of  the  application  and  certificate 
of  the  association  provided  for  in  the  preceding  section, 
the  Comptroller  of  the  Currency  shall  cause  a  special 
examination  to  be  made,  at  the  expense  of  the  association, 
to  determine  its  condition;  and  if  after  such  examination  or 
otherwise  it  appears  to  him  that  said  association  is  in  a 
satisfactory  condition  he  shall  grant  his  certificate  of 
approval  provided  for  in  the  preceding  section,  or  if  it 
appears  that  the  condition  of  said  association  is  not  satis- 
factory, he  should  withhold  such  certificate  of  approval. 

The  court  held  that  the  examination  required  by  this  section 
is  the  same  kind  of  an  examination  and  for  the  same  purpose  as 
that  provided  for  in  Section  5169  of  the  Revised  Statutes  relating 
to  the  inquiry  to  be  made  by  the  Comptroller  before  granting  per- 
mission to  begin  business. 

Congress,  the  court  held,  used  the  word  "condition"  to  indi- 
cate an  inquiry  of  the  broadest  scope. 

It  is  not  believed  that  the  Supreme  Court  of  the  United  States 
would  sustain  the  opinion  rendered  by  Justice  McCoy  in  his  inter- 
pretation of  the  law  relating  to  the  discretionary  powers  of  the 


456  ROMANCE  AND  TRAGEDY  OF  BANKING 

Comptroller  of  the  Currency  with  respect  to  extensions  of  char- 
ters of  national  banks.  No  such  interpretation  as  that  placed 
upon  the  language  of  the  statute  by  the  court  ever  was  enter- 
tained bv  any  Comptroller  since  its  enactment,  except  Mr. 
Williams. 

John  Jay  Knox  was  Comptroller  at  the  time  the  Act  of  July 
12,  1882,  was  passed,  providing  for  extensions  of  charters.  He 
recommended  this  legislation  to  Congress  in  his  annual  report  for 
1881,  and  drafted  the  original  enactment. 

On  page  X  of  the  text  of  his  report  for  1881,  Mr.  Knox 
said  : 

It  is  recommended  that  an  act  be  passed  during  the 
present  session,  authorizing  any  national  bank,  with  the 
approval  of  the  Comptroller,  at  any  time  within  two  years 
prior  to  the  date  of  the  expiration  of  its  corporate  ex- 
istence, to  extend  its  period  of  succession  for  twenty 
years,  by  amending  its  articles  of  association.  The  bill 
may  provide  that  such  amendments  must  be  authorized  by 
the  votes  of  shareholders  owning  not  less  than  two-thirds 
of  the  capital  of  the  association,  the  amendment  to  be 
certified  to  the  Comptroller  of  the  Currency,  by  the  presi- 
dent or  cashier,  verified  by  the  seal  of  the  association, 
and  not  to  be  valid  until  the  Comptroller's  approval 
thereof  shall  have  been  obtained,  and  he  shall  have  given 
to  the  association  a  certificate  authorizing  it  to  continue 
its  business  under  such  extension.  Responsibility  for  the 
extension  of  the  corporate  existence  of  the  banks  will  thus, 
in  a  measure,  rest  with  the  Comptroller;  and  he  can  require 
such  an  examination  of  its  affairs  to  be  made,  prior  to 
granting  the  extension,  as  may  seem  to  him  proper, 
in  order  to  ascertain  if  the  capital  stock  is  intact,  and 
all  the  assets  of  the  bank  in  a  satisfactory  condition. 

Section  3  of  the  Act  of  July  12,  1882,  above  quoted,  requires 
a  special  examination  of  a  national  bank  before  extension  of  its 
charter,  and  if  such  examination  shows  the  bank  to  be  in  a  "satis- 
factory condition"  the  Comptroller  is  required  to  issue  his  cer- 
tificate of  extension. 

The  words  "satisfactory  condition"  always  were  held  by  the 
Comptroller's  office,  and  by  its  legal  advisers,  to  mean  that  the 


ROMANCE  AND  TEAGEDY  OF  BANKING     457 

bank  was  in  a  solvent  condition  at  the  time  of  the  special  examina- 
tion, that  its  capital  was  unimpaired  and  that  its  business  was 
being  conducted  within  the  provisions  and  limitations  of  the  na- 
tional banking  laws. 

If  the  special  examination  showed  an  unsatisfactory  condi- 
tion the  practice  was  to  notify  the  board  of  directors  and  require 
the  matters  complained  of  to  be  corrected  as  a  condition  prece- 
dent to  the  approval  of  an  extension  of  the  bank's  charter.  It 
was  not  the  practice  to  investigate  the  condition  of  the  bank  run- 
ning back  a  number  of  years  into  periods  covered  by  former  ad- 
ministrations of  the  Comptroller's  office,  as  was  done  in  the  case 
of  the  Riggs  National  Bank,  and  there  was  no  precedent  to  be 
found  in  the  records  of  the  bureau  for  such  a  procedure. 

The  duty  and  powers  of  the  Comptroller  in  passing  upon 
applications  for  extension  of  charters  were  believed  to  be  limited 
to  ascertaining  "if  the  capital  stock  is  intact,  and  all  of  the 
assets  of  the  bank  in  a  satisfactory  condition". 

This  was  believed  to  be  the  intent  of  the  Act  of  July  12,  1882, 
and  was  so  understood  by  John  Jay  Knox,  who  recommended  the 
amendment  to  the  law  and  drafted  this  enactment,  the  opinion  of 
Mr.  Justice  McCoy  of  the  Supreme  Court  of  the  District  of 
Columbia  to  the  contrary  notwithstanding. 

On  May  23,  1916,  a  committee  representing  the  stockholders 
and  board  of  directors  of  the  Riggs  National  Bank  called  in  per- 
son upon  the  Comptroller  and  filed  with  him  a  formal  application 
for  extension  of  the  bank's  charter.  The  spokesman  of  the  com- 
mittee, after  briefly  stating  the  object  of  their  visit,  tendered  the 
application  to  Mr.  Williams,  who  declined  to  receive  it  from  his 
hands  and  motioned  to  him  to  lay  it  on  the  desk.  The  paper  was 
laid  on  the  desk  and  the  committee  withdrew. 

Under  date  of  June  21,  1916,  Mr.  Williams  addressed  a  com- 
munication to  the  Riggs  National  Bank,  covering  thirteen  type- 
written pages,  in  which  he  called  attention  to  an  error  in  the 
application,  which  requested  an  extension  of  the  charter  for  the 
period  of  twenty  years  and  one  day,  and  required  an  amended 
application  for  twenty  years'  extension  in  conformity  with  law. 
The  amended  application  was  filed  on  June  26,  1916,  in  compli- 
ance with  the  Comptroller's  request. 


458          ROMANCE  AND  TRAGEDY  OF  BANKING 

In  the  communication  above  referred  to  Comptroller  Williams 
called  the  bank's  attention  to  Section  3  of  the  Act  of  July  12, 
1882,  providing  for  extension  of  charters,  and  to  the  construc- 
tion placed  upon  the  word  "condition"  by  Justice  McCoy  of  the 
Supreme  Court  of  the  District  of  Columbia  in  the  decision  ren- 
dered by  him  under  date  of  May  31,  1916,  in  the  suit  of  the  Riggs 
National  Bank  vs.  the  Comptroller  of  the  Currency  et  al.,  in 
which  the  court  held  that  the  word  "condition"  comprehended  not 
only  the  solvency  of  the  bank  but  the  character  of  the  business 
done. 

The  communication  then  referred  to  the  numerous  violations 
of  law  committed  by  the  bank's  officers  during  the  existence  of  the 
institution,  mentioning  the  officers  by  name  and  the  specific  nature 
of  some  of  their  unlawful  transactions,  and  concluded  with  a  ref- 
erence to  their  refusal  to  furnish  certain  special  reports  called  for 
by  the  Comptroller  and  denial  of  his  authority  under  the  law  to 
call  for  such  reports. 

It  was  a  serious  question,  the  Comptroller  stated,  whether 
the  corporate  existence  of  a  bank  should  be  extended  whose  officers 
had  defied  his  authority  and  challenged  his  right  to  call  for  in- 
formation which,  in  his  judgment,  was  deemed  necessary  to  a 
proper  understanding  of  the  condition  of  the  bank,  if  the  same 
officers  were  to  be  continued  in  charge  of  the  bank's  affairs. 

If  the  practices  and  methods  of  these  officers,  the  Comptroller 
stated,  which  had  been  the  subject  of  criticism  for  years  had 
continued  to  the  date  of  the  application  for  extension  of  charter 
then  pending,  the  extension  could  not  lawfully  have  been  ap- 
proved, but  the  records  of  the  Comptroller's  office  showed  that 
during  the  preceding  eighteen  months  the  unlawful  practices 
complained  of  had  been  discontinued  and  that  the  condition  of 
the  bank  had  been  generally  satisfactory,  with  the  exception  of 
the  refusal  to  furnish  the  special  reports  called  for. 

The  decision  of  the  court,  however,  the  Comptroller  stated, 
afforded  a  solution  of  this  phase  of  the  situation,  and  as  the 
officers  of  the  bank  accepted  the  court's  decision  as  to  the  Comp- 
troller's authority  to  call  for  special  reports  and  the  board  of 
directors  solemnly  pledged  themselves  to  see  that  the  affairs  of 
the  bank  would  in  future  be  conducted  strictly  in  compliance  with 


ROMANCE  AND  TRAGEDY  OF  BANKING  459 

the  national  banking  laws  and  in  conformity  with  the  lawful 
rules,  regulations  and  requirements  of  the  office  of  the  Comptroller 
of  the  Currency,  the  Comptroller  advised  the  directors  that  he  had 
concluded  to  extend  the  bank's  charter. 

The  Certificate  of  Extension  was  signed  at  nine  o'clock  on 
the  morning  of  June  24,  1916,  by  Deputy  Comptroller  Thomas  P. 
Kane  as  Acting  Comptroller. 

Some  inquiries  and  comments  were  made  as  to  why  Mr.  Wil- 
liams did  not  sign  this  certificate  as  Comptroller,  and  it  was  stated 
in  explanation  that  it  was  signed  by  the  Deputy  Comptroller  as 
Acting  Comptroller  as  a  matter  of  expediency. 

It  appears  that  a  meeting  of  the  board  of  directors  of  the 
bank  had  been  called  for  ten  o'clock  on  the  morning  of  that  date 
and  a  representative  of  the  bank  had  requested  the  Comptroller 
to  issue  his  certificate  as  early  in  the  day  as  possible  in  order 
that  it  might  be  presented  to  the  directors  at  the  board  meeting, 
and  Mr.  Williams  authorized  the  Deputy  Comptroller  to  sign 
the  certicate  if  he  should  be  delayed  in  reaching  the  office  on  the 
morning  of  the  twenty-fourth. 

As  Mr.  Williams  was  late  in  arriving  at  the  office  on  that  date 
the  Deputy  Comptroller  s;gned  the  certificate  as  Acting  Comp- 
troller and  it  was  delivered  to  Mr.  Darlington,  a  director  of  the 
bank,  before  ten  o'clock,  who  called  in  person  for  it. 

The  last  chapter  of  this  unprecedented  controversy  was  writ- 
ten on  Saturday,  July  1,  1916,  when  the  attorney  for  the  bank, 
in  behalf  of  himself  and  his  former  associates  in  the  case,  ordered 
a  discontinuance  of  the  equity  suit  brought  by  the  bank  against 
the  Comptroller  of  the  Currency,  the  Secretary  of  the  Treasury 
and  the  Treasurer  of  the  United  States.  This  step  followed  the 
agreement  reached  by  the  parties  to  the  suit  when  the  Comptroller 
declared  his  purpose  to  extend  the  charter  of  the  bank. 

While  the  signed  acceptance  by  the  directors  of  the  bank  of 
the  decision  of  Mr.  Justice  McCoy  as  to  the  scope  of  the  Comp- 
troller's powers  in  calling  for  special  reports,  and  the  Comp- 
troller's determination  to  extend  the  bank's  charter  in  view  of  this 
recognition,  afforded  a  very  happy  solution  and  settlement  of  this 
bitter  controversy,  it  is  to  be  regretted  that  the  important  ques- 
tion involved  in  the  case  could  not  have  been  passed  upon  by  the 


460          ROMANCE  AND  TRAGEDY  OF  BANKING 

court  of  last  resort,  and  a  decision  reached  as  to  the  extent  of  the 
Comptroller's  authority  to  pry  into  the  past  affairs  of  a  bank 
and  the  individual  transactions  of  its  officers  in  connection  with  an 
application  for  extension  of  charter. 

Indictment  of  Bank's  Officers  for  Perjury 

In  the  affidavit  made  by  Mr.  Williams  and  filed  in  the  action 
brought  by  the  officers  of  the  Riggs  National  Bank  against  the 
Comptroller,  it  was  alleged,  among  other  things,  that  from  the 
date  of  its  organization  as  a  national  bank  until  the  practice  was 
stopped  by  his  investigations,  the  Riggs  National  Bank  con- 
ducted an  extensive  stock  brokerage  business  through  Lewis  John- 
son &  Company,  buying  and  selling  stocks  on  commission  in  vio- 
lation of  law. 

Lewis  Johnson  &  Company  was  an  unincorporated  banking 
and  brokerage  concern  doing  business  in  Washington,  through 
which  the  Riggs  National  Bank  was  supposed  to  have  conducted 
its  alleged  unlawful  stock  operations.  This  company  had  failed 
a  short  time  previously  and  went  into  bankruptcy. 

These  allegations  were  denied  by  the  bank's  officers  in  a  joint 
affidavit  made  by  the  president,  vice-president  and  cashier,  dated 
May  19,  1915,  and  filed  in  the  case. 

In  this  affidavit  it  was  declared  that  the  Riggs  National  Bank 
never  at  any  time  bought  or  sold  any  stocks  whatever  from  or 
through  Lewis  Johnson  &  Company. 

Following  the  filing  of  this  affidavit,  the  court  at  the  instance 
of  the  United  States  Attorney  made  an  order  on  the  trustees  in 
bankruptcy  of  the  estate  of  Lewis  Johnson  &  Company,  requir- 
ing them  to  surrender  to  the  custody  of  the  United  States  Attor- 
ney the  accounts  standing  in  the  name  of  the  Riggs  National 
Bank  appearing  on  the  books  of  the  brokerage  firm.  National 
bank  examiners  were  then  put  to  work  upon  these  accounts,  which 
numbered  about  six  thousand,  and  after  a  lengthy  and  exhaustive 
investigation,  involving  the  tracing  of  every  item  through  the 
books,  reported  their  findings  to  the  United  States  District  At- 
torney, who  submitted  the  facts  presented  to  the  grand  jury.  On 
October  1,  1915,  four  indictments  were  returned,  one  against 


ROMANCE  AND  TRAGEDY  OF  BANKING  461 

Charles  G.  Glover,  president  of  the  bank;  William  J.  Flather, 
vice-president,  and  Henry  H.  Flather,  cashier,  jointly,  and  one 
against  three  of  these  officials  individually,  charging  them  with 
perjury  in  having  sworn  falsely  that  the  bank  never  at  any  time 
oought  or  sold  any  stock  through  the  firm  of  Lewis  Johnson  & 
Company,  when  the  books  of  this  defunct  concern  showed  numer- 
ous accounts  of  stock  purchases  and  sales  carried  in  the  name  of 
the  Riggs  National  Bank. 

In  anticipation  of  some  such  action  on  the  part  of  the  Gov- 
ernment the  board  of  directors  of  the  bank  appointed  a  special 
committee  of  three  directors,  with  authority  to  employ  expert 
accountants  and  special  counsel,  to  make  an  investigation  of  all 
matters  involved  in  the  affidavit  made  by  Messrs.  Glover  and 
Flathers,  the  truth  of  which  was  questioned  by  the  indictment. 
This  committee  employed  the  American  Audit  Company  of  New 
York  to  make  a  thorough  and  complete  examination  of  the 
records  of  the  bank  and  of  all  transactions  of  the  bank  or  any  of 
its  officers  with  Lewis  Johnson  &  Compnay. 

This  audit  company  pursued  its  investigations  daily  for  a 
period  of  about  four  months.  Item  by  item  in  the  affidavit  filed  by 
the  Government  was  traced  through  the  books  and  identified,  and 
all  but  a  relatively  small  number  were  identified  as  being  for  the 
account  of  particular  individuals,  and  it  was  claimed  by  the  bank, 
in  a  published  statement,  that  no  one  of  the  transactions  was 
made  for  or  in  any  way  on  account  of  the  Riggs  National  Bank, 
and  that  each  and  every  so-called  short  sale  was  traced  and  iden- 
tified as  being  that  of  an  individual  and  in  no  single  instance  as 
that  of  the  bank. 

The  bank  in  a  statement  issued  for  the  information  of  its 
stockholders,  depositors  and  customers  said  that  the  indictments 
grew  out  of  a  controversy  regarding  a  purely  technical  construc- 
tion of  the  phraseology  of  an  affidavit  filed  in  the  course  of  the 
argument  in  the  pending  suit  of  the  Riggs  National  Bank  against 
officers  of  the  Government,  by  which  neither  the  court  nor  anyone 
else  was  deceived,  and  without  any  charge  involving  loss  or  injury 
to  the  property  or  business  of  the  bank. 

In  explanation  of  the  stock  transactions  with  Lewis  Johnson 
£  Company  the  bank  in  its  published  statement  said  that  in  order 


462          ROMANCE  AND  TRAGEDY  OF  BANKING 

to  facilitate  the  making  of  investments  by  its  depositors  and  cus- 
tomers it  was  the  practice  of  the  bank  to  execute  orders  when 
received  through  one  of  its  officers  acting  in  his  individual  capac- 
ity as  a  member  of  the  Washington  Stock  Exchange  or  otherwise. 
Such  orders,  it  was  stated,  were  always  on  a  cash  basis  and  not 
upon  margin. 

While  the  transaction  was  conducted  upon  the  order  and  for 
the  account  of  a  particular  depositor,  customer  or  other  individ- 
ual, in  the  course  of  business  the  execution  of  such  orders  was 
reported  by  the  brokers  directly  to  the  bank,  but  no  order  or 
transaction  was  ever  made  by  the  bank  for  its  own  behalf  or 
profit,  but  invariably  in  behalf  of  others. 

The  fact  that  the  bank  cleared  orders  of  the  nature  indicated 
for  depositors  and  customers,  it  was  stated,  was  open  and  well 
known  to  the  investing  community,  and  to  every  Comptroller  of 
the  Currency,  and  to  every  bank  examiner  who  examined  the  bank. 

Since  the  passage  of  the  Federal  Reserve  Act,  however,  it  was 
stated,  this  practice  had  been  discontinued,  for  the  reason  pre- 
sumably that  it  might  be  held  to  be  in  violation  of  Section  22 
of  the  Federal  Reserve  Act. 

The  bank's  counsel  denounced  in  a  public  statement  as  ma- 
licious persecution  the  action  of  the  Government  in  procuring  this 
indictment  while  the  civil  suit  of  the  bank  against  two  government 
officials  was  pending,  and  stated  that  such  action  looked  danger- 
ously like  an  attempt  to  invoke  the  operation  of  the  criminal 
court  to  punish  the  officers  of  the  bank  for  their  temerity  in  ap- 
pealing to  the  courts  for  protection  against  persecution.  Counsel 
stated  that  the  action  of  the  Secretary  of  the  Treasury  and  the 
Comptroller  of  the  Currency  in  inducing  the  Department  of  Jus- 
tice to  obtain  the  indictments  proved  that  they  were  actuated  by 
malice  against  which  the  bank  sought  protection  in  the  court. 

The  criminal  case  was  called  for  trial  May  8,  1915.  The 
Government  was  represented  by  the  United  States  District  Attor- 
ney, assisted  by  special  counsel  from  the  Department  of  Justice. 
The  defendants  were  represented  by  eminent  attorneys  of  the  dis- 
trict bar,  assisted  by  ex-Governor  John  B.  Stanchfield  of  New 
York.  Great  interest  was  manifested  in  the  case  and  many  dis- 
tinguished members  of  the  district  bar,  bankers  and  Congressmen 


ROMANCE  AND  TRAGEDY  OF  BANKING  463 

were  present  in  court  as  the  trial  progressed.  Two  ex-Presidents 
of  the  United  States,  William  Howard  Taft  and  Theodore  Roose- 
velt, were  character  witnesses  for  the  defendants  and  testified  to 
their  unimpeachable  integrity  and  high  social  and  business  stand- 
ing in  the  community. 

Intense  feeling  was  displayed  between  counsel  throughout  the 
trial  and  arguments  and  one  of  the  attorneys  for  the  bank  offi- 
cials took  the  witness  stand  and  testified  that  he  personally  drew 
the  affidavit  on  which  the  indictments  were  based,  denying  that  the 
Riggs  National  Bank  had  dealt  in  stocks.  He  explained  in  detail 
the  circumstances  under  which  the  document  was  drawn,  signed 
and  sworn  to.  He  stated  that  he  carefully  explained  to  the 
signers  of  the  affidavit  what  he  meant  by  the  language  used,  that 
the  Riggs  National  Bank,  as  a  bank,  had  never  purchased,  sold, 
or  dealt  short  in  stocks,  and  that  if  there  were  any  accounts  car- 
ried on  the  books  of  Lewis  Johnson  &  Company  purporting  to 
show  such  purchases,  sales  or  dealings  by  the  bank,  such  accounts 
were  false.  He  stated  that  he  explained  to  the  defendants  before 
they  signed  the  affidavit  that  the  affidavit  did  not  relate  to  the 
brokerage  transactions  in  which  the  officers  of  the  bank  in  their 
individual  capacity  bought  and  sold  stocks  for  customers.  He 
declared  that  he  alone  was  responsible  for  the  wording  of  the 
affidavit  and  that  the  language  used  meant  precisely  what  he  in- 
tended it  should  mean. 

The  explanation  of  this  witness  was  so  clear  and  convincing 
that  the  defense  could  have  safely  rested  their  case  on  his  testi- 
mony alone  as  totally  destroying  all  evidence  of  any  intent  on 
their  part  to  wilfully  make  a  false  statement  in  the  affidavit. 

The  trial  lasted  twenty  days.  The  case  was  given  to  the  jury 
on  the  morning  of  May  27,  1916,  and  a  verdict  of  "not  guilty" 
was  returned  within  nine  minutes  from  the  time  they  left  the  jury 
box.  Only  one  ballot  was  taken  which  was  unanimously  in  favor 
of  acquittal. 

Origin  of  the  Riggs  National  Bank 

.  In  1837,  W.  W.  Corcoran  established  a  private  bank  and 
brokerage  office  on  Pennsylvania  avenue  near  Fifteenth  street, 
directly  opposite  the  north  front  of  the  United  States  Treasury 


464  ROMANCE  AND  TRAGEDY  OF  BANKING 

Department.  In  1839  this  office  was  removed  to  the  old  Bank  of 
Metropolis  Building  on  the  corner  of  Fifteenth  and  F  streets. 
In  1810  George  W.  Riggs  became  a  partner  of  W.  W.  Corcoran 
and  the  business  was  conducted  under  the  firm  name  of  Corcoran  & 
Riggs.  This  firm  purchased  the  building  of  the  old  Bank  of  the 
United  States  on  the  northwest  corner  of  Fifteenth  street  and 
Pennsylvania  avenue.  After  the  death  of  Mr.  Corcoran,  Charles 
C.  Glover  and  Thomas  Hyde  entered  the  firm  and  continued  the 
business  under  the  name  of  Riggs  &  Company. 

On  June  27,  1896,  the  partners  of  Riggs  &  Company  organ- 
ized the  Riggs  National  Bank  to  succeed  the  private  bank  and 
brokerage  firm  and  commenced  business  as  a  national  institution 
on  June  30,  1896,  with  an  authorized  capital  stock  of  $500,000. 
On  April  11,  1903,  the  capital  was  increased  to  $1,000,000. 

It  will  thus  be  seen  that  the  Riggs  National  Bank  was  an  old 
and  honorable  institution.  Its  founder  and  his  successors  were 
substantial  and  leading  citizens  of  Washington,  prominent  in  the 
financial  and  business  activities  of  the  city.  The  bank  from  its 
early  organization  had  an  unquestioned  reputation  for  conserva- 
tism and  good  management.  It  always  was  considered  one  of 
Washington's  largest,  strongest  and  best  financial  institutions, 
and  enjoyed  the  full  confidence  of  its  patrons  and  of  the  com- 
munity. 

Like  seventy-five  per  cent,  of  the  national  banks  throughout 
the  country,  the  Riggs  National  Bank  violated  at  times  some  of 
the  provisions  of  the  national  banking  laws,  such  as  making  loans 
in  excess  of  the  legal  limit  or  upon  the  security  of  real  estate 
mortgages,  failure  to  maintain  the  required  reserve,  investments 
in  stocks,  buying  and  selling  bonds  and  stocks  on  commission, 
and  engaging  in  other  transactions  either  expressly  prohibited  by 
law  or  beyond  the  powers  of  a  national  bank. 

None  of  these  transactions,  however,  affected  or  endangered 
the  solvency  of  the  institution  in  the  least  degree,  but  on  the  con- 
trary were  more  or  less  profitable  to  the  bank. 

Following  each  examination  for  years  previous  to  the  incum- 
bency of  Mr.  Williams  as  Comptroller  the  attention  of  the  officers 
and  directors  of  this  bank  was  called  in  writing  to  the  violations 
of  law  reported  by  the  examiners  and  a  correction  demanded.  It 


ROMANCE  AND  TRAGEDY  OF  BANKING  465 

was  also  insisted  upon  that  the  unlawful  practices  or  transactions 
be  discontinued.  Correspondence  with  the  bank  and  personal 
conferences  with  its  officers  on  these  subjects  were  generally  con- 
ducted by  the  Deputy  Comptroller,  but  because  of  the  intimate 
personal  acquaintance  and  relationship  which  usually  existed 
between  the  principal  officers  of  this  bank  and  some  of  the  higher 
officials  of  the  Treasury  Department,  very  little,  if  any,  attention 
was  paid  to  the  Deputy  Comptroller's  demands  and  admonitions, 
and  the  bank  continued  for  years  to  be  the  subject  of  criticism 
by  the  Comptroller's  office  on  account  of  the  unlawful  transac- 
tions and  practices  complained  of. 

On  one  occasion  the  Deputy  Comptroller  met  one  of  the  prin- 
cipal officers  of  this  bank  at  a  gathering  of  the  bankers  of  the 
District  of  Columbia.  On  entering  the  room  where  he  and  some 
other  bankers  were  assembled,  this  officer  remarked  in  rather  a 
sneering  manner:  "Here  comes  the  man  who  writes  those  letters 
to  the  banks  telling  them  how  they  should  conduct  their  business." 

The  Deputy  Comptroller  replied  that  there  was  no  intention 
or  disposition  on  the  part  of  the  Comptroller's  office  to  run  the 
banks  or  to  interfere  with  their  business,  except  to  require  that 
they  be  conducted  within  the  provisions  and  limitations  of  the 
national  banking  laws  and  the  regulations  of  the  Comptroller 
based  upon  such  laws.  He  was  told  that  he  might  belittle  the 
letters  of  criticism  received  from  the  Comptroller's  office  and  dis- 
regard their  requirements  and  admonitions,  but  his  bank  was 
being  placed  on  the  official  records  by  such  letters  as  a  violator  of 
the  law,  and  the  time  might  come  when  that  record  would  confront 
him  and  his  fellow  officers  and  call  for  an  explanation  of  their 
course  of  action,  as  other  bankers  had  been  called  upon  to  do 
under  similar  circumstances,  to  their  sorrow.  In  view  of  subse- 
quent events  this  warning  seemed  prophetic. 

Whether  or  not  Mr.  Williams  was  actuated  by  animosity  in 
his  dealings  with  the  Riggs  National  Bank,  growing  out  of  former 
personal  differences  with  some  of  its  officers  and  their  open  oppo- 
sition to  his  confirmation  as  Comptroller,  as  was  freely  charged, 
the  instance  above  referred  to  is  only  one  of  many  that  could  be 
recited  to  illustrate  the  insolent  and  arrogant  manner  in  which 
some  of  the  officials  of  that  bank  received  and  disregarded  the 


466          ROMANCE  AND  TRAGEDY  OF  BANKING 

admonitions  of  the  Comptroller's  office  when  their  attention  was 
called  to  violations  of  law  and  other  irregularities,  and  the  spirit 
which  prevailed  in  the  bank  when  Mr.  Williams  became  Comptrol- 
ler of  the  Currency,  and  with  which  he  had  to  contend. 

In  the  meantime  many  of  the  unlawful  practices  formerly 
engaged  in  had  been  discontinued.  The  law  had  been  amended 
increasing  the  limit  of  loans  from  ten  per  cent,  of  capital  to  ten 
per  cent,  of  capital  and  surplus,  thereby  legalizing  the  large  un- 
lawful loans  which  this  bank  had  been  in  the  habit  of  making.  The 
decisions  of  the  courts  and  the  rulings  of  successive  Comptrollers 
modified  the  position  of  the  office  with  respect  to  real  estate  loans 
and  enabled  the  banks  to  make  loans  indirectly  secured  by  real 
estate  which  before  had  been  held  to  be  unlawful,  and  the  bank 
changed  its  method  of  handling  bond  and  stock  transactions. 
So  that  at  the  time  Mr.  Williams  assumed  charge  of  the  Comp- 
troller's office  the  reports  of  the  bank  examiners  disclosed  very 
little,  if  anything,  in  this  bank  calling  for  criticism,  and  the  bank 
apparently  was  in  a  sound  and  satisfactory  condition. 

Had  this  bank  been  handled  as  firmly  by  former  Comptrollers, 
when  it  was  violating  the  law  with  impunity,  as  it  was  by  Comp- 
troller Williams,  the  effect  would  have  been  very  beneficial.  But 
the  officers  of  the  bank  could  not  understand  why  long  after  their 
unlawful  practices  above  mentioned  had  been  discontinued,  Mr. 
Williams  should  deem  it  incumbent  upon  himself  to  make  the  bank 
the  object  of  his  special  regard  so  soon  after  he  became  Comp- 
troller, and  subject  it  to  almost  continuous  examination  for  near- 
ly an  entire  year,  investigating  and  requiring  special  reports 
covering  transactions  running  back  to  the  date  the  bank  opened 
for  business,  and  therefore  they  attributed  his  action  to  personal 
animosity,  especially  because  of  the  fact,  it  was  claimed,  that  at 
the  time  the  Riggs  National  Bank  was  receiving  the  continuous 
and  undivided  attention  of  Comptroller  Williams  and  the  exam- 
iners, there  were  thirteen  national  banks,  six  trust  companies  and 
nineteen  savings  banks  in  the  city  of  Washington,  nearly  all  of 
which,  they  stated,  were  long  past  due  for  examination,  and  sev- 
eral of  them  had  not  been  examined  for  eight  or  ten  months.  One 
of  these  banks,  it  was  alleged,  had  succeeded  the  Riggs  National 
Bank  in  the  financial  affections  and  patronage  of  the  then  officials 


ROMANCE  AND  TRAGEDY  OF  BANKING  467 

of  the  Treasury  Department,  and  was  reputed  to  be  in  a  very 
unsatisfactory  condition  at  the  time  of  its  last  examination. 

Activities  of  Comptroller   Williams 

The  law  requires  every  national  bank  to  make  not  less  than 
five  reports  of  condition  each  year,  according  to  the  form  pre- 
scribed by  the  Comptroller,  verified  by  the  oath  or  affirmation  of 
the  president  or  cashier,  and  attested  by  the  signatures  of  at 
least  three  of  the  directors. 

From  the  establishment  of  the  Currency  Bureau  by  McCul- 
loch,  in  1863,  to  the  time  Mr.  Williams  assumed  charge  of  the 
office,  in  1914,  there  was  a  great  deal  of  uniformity  in  the  form 
of  reports  of  condition  and  no  Comptroller  ever  called  for  more 
than  five  reports  during  any  one  report  year,  which  covered  the 
period  from  November  1  to  October  31.  Comptroller  Williams,, 
however,  made  frequent  and  radical  changes  in  the  form  and 
called  for  six  reports  during  the  year  1914  and  following. 

He  also  enlarged  the  report  blank  very  materially  by  adding 
many  new  items  and  schedules,  making  the  report  much  more  diffi- 
cult to  prepare,  and  more  expensive  to  the  banks  to  publish.  It 
also  required  so  much  more  time  and  labor  on  the  part  of  the  em- 
ployees of  the  Comptroller's  office  to  examine  and  abstract  that 
it  was  impossible  with  the  limited  clerical  force  to  complete  the 
work  between  calls  and  much  of  it  had  to  go  undone. 

Many  special  reports  were  called  for  and  the  banks  were  re- 
quired to  furnish  a  vast  amount  of  statistical  and  detail  informa- 
tion. 

In  January,  1915,  a  circular  letter  was  sent  to  all  national 
banks  requiring  the  discontinuance  of  overdrafts.  The  directors 
were  required  to  adopt  a  resolution  prohibiting  any  officer  or 
employee  of  the  bank  from  paying  or  charging  to  the  account  of 
any  depositor  any  check  in  excess  of  the  amount  to  the  credit  of 
the  drawer  on  the  books  of  the  bank. 

Theretofore  it  had  been  the  practice  of  the  Comptroller's  office 
to  discourage  overdrafts  as  much  as  possible,  and  whenever  the 
reports  of  examiners  showed  overdrafts  for  any  material  amount 
and  that  the  practice  of  granting  them  had  become  habitual  on 


468  ROMANCE  AND  TRAGEDY  OF  BANKING 

the  part  of  the  bank,  the  board  of  directors  was  required  to  col- 
lect the  loans  and  to  discontinue  the  practice. 

Overdrafts  always  were  regarded  by  the  Comptroller's  office 
as  the  most  objectionable  form  of  making  loans,  and  the  practice 
was  discouraged  and  condemned  wherever  found  to  be  habitual, 
but  at  the  same  time  the  impracticability  or  impossibility  of 
eliminating  overdrafts  entirely  was  appreciated,  as  it  was  recog- 
nized that  small  overdrafts  occasionally  were  unavoidable.  For 
this  reason  no  Comptroller  before  Mr.  Williams  ever  undertook  to 
require  the  banks  to  prohibit  overdrawing  entirely. 

Comptroller  Williams'  requirement,  therefore,  in  this  respect 
was  regarded  by  the  banks  as  extremely  radical  and  impracticable, 
as  it  admitted  of  no  exceptions,  but  while  it  caused  a  great  deal 
of  dissatisfaction  it  accomplished  some  good  results,  as  it  had 
the  effect  of  reducing  overdrafts  from  $15,798,224.76,  as  shown 
by  the  reports  of  the  banks  under  the  call  of  December  31,  1914, 
made  immediately  before  the  issuance  of  the  circular,  to  $7,046,- 
524.16,  as  shown  by  the  reports  furnished  under  the  call  of  March 
4,  1915,  immediately  following. 

On  October  27,  1915,  Comptroller  Williams  issued  another 
circular  to  the  banks  calling  the  attention  of  boards  of  directors 
to  their  oaths  of  office,  declaring  that  they  would  not  knowingly 
violate  or  willingly  permit  to  be  violated  any  of  the  provisions  of 
the  statutes  of  the  United  States  under  which  their  bank  was  or- 
ganized, and  also  to  Section  5197  of  the  Revised  Statutes  of  the 
United  States,  which  prohibited  a  national  bank  from  taking, 
receiving,  reserving  and  charging  on  any  loan  or  discount  made, 
or  upon  any  note,  bill  of  exchange  or  other  evidence  of  debt, 
interest  in  excess  of  the  rate  allowed  by  the  laws  of  the  State  in 
which  the  bank  was  located,  or  when  no  rate  was  fixed  by  the 
State  laws  a  rate  not  exceeding  seven  per  centum  per  annum. 

This  circular  letter  then  called  attention  to  the  fact  that  the 
sworn  reports  of  condition  of  a  great  many  banks  showed  that  the 
section  of  the  law  above  referred  to  was  being  grossly  violated  by 
many  banks,  and  admonished  the  banks  that  the  law  must  be 
strictly  observed. 

Letters  were  received  from  a  large  number  of  banks  in  reply 
to  this  circular,  stating  that  it  had  been  their  practice  to  make  a 


469 

minimum  charge  of  from  twenty-five  cents  to  one  dollar  on  small 
loans  varying  in  amount  from  ten  dollars  and  upwards,  running 
for  periods  of  from  thirty  to  sixty  or  ninety  days.  This  mini- 
mum charge,  it  was  claimed,  was  necessary  to  cover  the  expenses 
of  the  bank  for  postage,  stationery  and  bookkeeping  incidental  to 
the  loans,  and  if  this  expense  was  to  be  considered  interest 
charged,  the  bank  could  not  make  the  loans  without  violating  the 
usury  laws,  as  the  legal  rate  of  interest  on  loans  of  this  character 
would  not  compensate  the  bank  for  the  time  and  clerical  labor 
of  passing  them  through  the  books.  It  was  therefore  claimed  that 
this  minimum  charge  should  be  considered  an  expense  and  not 
interest. 

In  response  to  these  protests  the  banks  were  advised  that  the 
Comptroller  had  no  power  to  authorize  any  bank  to  charge  on 
any  loan  a  rate  of  interest  in  excess  of  the  rate  permitted  by  the 
laws  of  the  State  in  which  the  bank  was  situated,  and  the  report 
of  condition  blank  sent  out  with  the  call  of  December  31,  1915, 
required  the  banks  to  state  the  number  of  loans  upon  which  inter- 
est, discount  or  commission  was  charged  or  collected  at  rates 
which  would  amount  to  more  than  the  equivalent  of  six  per  cent, 
per  annum. 

The  banks  were  cautioned  by  the  Comptroller  to  prepare  their 
statements  with  care  and  accuracy  as  the  bank  examiners  would 
be  required  to  verify  the  correctness  of  all  reports  if  any  were 
found  to  be  inaccurate. 

The  banks  were  also  requested  to  state  whether  it  was  their 
practice  to  require  borrowers  to  carry  a  deposit  when  loans  were 
granted  them,  and  to  furnish  complete  information  as  to  the 
connections  of  officers  and  directors  with  other  banks  or  trust 
companies,  their  salaries,  liability  as  payers,  etc. 

In  his  annual  report  for  the  year  ended  October  31,  1915, 
Comptroller  Williams  stated  that  in  the  autumn  of  1914,  after 
the  stock  exchanges  of  the  principal  cities  of  the  country  had 
been  closed  as  the  result  of  the  European  war,  a  number  of  the 
banks  in  these  cities  arbitrarily  raised  the  rates  of  interest  on 
their  loans  secured  by  stocks  and  bonds  from  the  ante-war  rates 
of  two  or  three  per  cent,  to  eight,  nine  or  ten  per  cent.,  and  in  a 
few  cases  as  high  as  twelve  per  cent,  per  annum. 


470  ROMANCE  AND  TRAGEDY  OF  BANKING 

On  November  1,  1914,  the  Comptroller  sent  telegrams  to  all 
national  banks  in  New  York  City  and  certain  other  large  cities, 
requiring  them  to  report  the  maximum  rates  of  interest  which 
they  were  at  that  time  charging  on  loans,  and  when  a  reduction 
to  a  six  per  cent,  rate  might  be  expected  if  they  were  charging  in 
excess  of  that  amount. 

In  consequence  of  these  telegrams,  the  Comptroller  stated, 
nearly  all  the  banks  which  were  charging  a  rate  in  excess  of  six 
per  cent,  promptly  reduced  the  rate  to  that  figure. 

In  New  York  City  three  of  the  larger  banks  took  exception  to 
the  Comptroller's  attitude  and  referred  to  it  as  an  attempt  to 
force  upon  the  banks  a  policy  which  they  might  not  consider  cor- 
rect, claiming  that  there  was  a  class  of  debtors  not  of  prime 
standing  and  not  having  prime  collateral  who  were  not  entitled  to 
acommodation  on  the  same  terms  as  others  more  desirable. 

The  effect  of  the  Comptroller's  action,  however,  was  the  re- 
duction in  the  high  rate  of  interest  by  a  number  of  banks  to  a 
uniform  rate  of  six  per  cent. 

After  securing  a  reduction  of  the  rates  of  interest  charged 
by  the  large  city  banks,  the  Comptroller  directed  his  attention  to 
the  rates  being  charged  by  the  smaller  banks  throughout  the 
country,  and  all  banks  were  required  to  furnish  the  information 
called  for  in  the  reports  of  condition  as  hereinbefore  indicated. 

An  analysis  of  the  reports  received  from  the  banks  in  response 
to  the  call  for  this  information  showed,  the  Comptroller  stated, 
that  some  national  banks  in  nearly  every  section  of  the  country 
were  charging  rates  of  interest  on  some  of  their  loans  not  only 
illegal  and  usurious,  but  injurious  to  the  community,  unfair  and 
burdensome. 

The  Comptroller  stated  that  these  excessive  and  usurious 
rates  were  being  charged  mostly  by  the  small  banks  in  rural  sec- 
tions of  the  South,  Southwest,  West  and  Northwest. 

Perhaps  no  administrative  action  on  the  part  of  Comptroller 
Williams  aroused  as  much  opposition  and  criticism  among  the 
bankers  as  his  requirement  in  regard  to  interest  charges  to  be 
shown  in  reports  of  condition  called  for  December  31,  1915,  in 
furtherance  of  his  anti-usury  campaign.  The  bankers  complained 
that  every  form  of  condition  report  sent  out  by  Comptroller 


ROMANCE  AND  TRAGEDY  OF  BANKING  471 

Williams  contained  a  number  of  new  questions  and  requirements, 
entailing  additional  clerical  work,  research  and  expense  to  the 
bank  and  delving  into  details  to  such  an  extent  as  to  seriously 
handicap  and  interfere  with  the  conduct  of  the  bank's  current 
business. 

Some  bank  officers,  under  advice  of  their  board  of  directors, 
flatly  refused  to  furnish  the  information  in  the  detail  required, 
stating  that  it  was  physically  and  practically  impossible  for  the 
work  to  be  done  within  the  five  days  allowed  by  law.  Many  banks 
protested  that  it  was  impossible  to  carry  on  the  current  business 
and  at  the  same  time  do  the  work  involved  in  the  preparation  of 
the  information  called  for  by  the  Comptroller,  as  it  would  require 
a  separate  interest  calculation  on  every  note,  varying  in  amounts 
and  dates  of  maturity,  some  on  a  discount  and  some  on  an  inter- 
est basis,  some  with  a  recording  fee  and  taxes  added  or  deducted, 
depending  upon  whether  paid  by  the  bank  or  by  the  borrower, 
often  changing  the  rate  one  per  cent,  or  more,  and  many  of  the 
notes  being  for  small  loans  of  five  or  ten  dollars  for  one  week  to 
one  month.  In  short,  the  requirements  of  the  Comptroller,  it  was 
contended,  necessitated  an  acute  examination  of  all  the  loans  of 
the  bank  for  an  entire  year,  which  was  practically  impossible 
without  additional  clerical  help  and  serious  interference  with  the 
bank's  current  business. 

The  annual  report  of  the  Comptroller  for  1915  contained  a 
long  list  of  loans  made  by  national  banks  for  the  period  from 
August  1,  1914,  to  November  27,  1914,  on  which  a  greater  rate  of 
interest  than  eight  per  cent,  was  charged.  This  list  gives  the 
date  and  amount  of  each  loan,  the  date  of  maturity  and  the  rate 
of  interest  charged  or  collected,  but  omits  the  names  of  the  banks. 
The  names  of  the  States  in  which  the  banks  were  located  were 
given. 

The  annual  report  of  the  Comptroller  contained  a  communi- 
cation six  and  a  half  pages  in  length  from  an  ex-judge  of  the 
County  Court  of  Sequoyah  County,  Oklahoma,  on  the  subject  of 
'The  Crimes  of  the  Usurer  in  Oklahoma".  It  was  charged  in  this 
communication  that  almost  every  bank  in  Oklahoma,  without  ex- 
ception, state  and  national,  was  engaged  in  the  business  of  exact- 
ing usurious  rates  of  interest. 


472  ROMANCE  AND  TRAGEDY  OF  BANKING 

The  writer  stated  that  when  he  first  went  to  Oklahoma  he 
made  a  study  of  the  subject  of  usury  "not  for  profit  but  because 
it  preyed  on  his  mind,"  to  such  an  extent  that  he  delivered  lectures 
and  wrote  essays  on  the  subject. 

By  way  of  illustration  he  proceeded  to  weave  a  very  pathetic 
story  around  some  poor  unfortunate  farmer  who,  it  was  alleged, 
had  become  entangled  in  the  meshes  of  one  of  those  excessive 
interest-charging  banks  and  was  fleeced  of  all  his  worldly  pos- 
sessions. 

This  farmer's  whole  stock  in  trade,  it  appears,  consisted  of 
four  mules,  a  horse  or  mare,  five  oxen,  six  yearlings,  one  or  two 
wagons,  etc.,  all  of  which  were  pledged  as  security  for  a  loan  and 
were  eventually  sold  by  the  bank  under  foreclosure  to  satisfy  the 
farmer's  debts,  leaving  him  penniless  and  a  pauper. 

Another  instance  was  narrated  of  a  man  who  also  "went  the 
road,"  as  this  correspondent  expressed  it.  This  man  was  old,  with 
a  family  of  six  children.  He  was  noted  for  his  hard-working 
qualities  "up  to  the  time  the  bank  began  to  pinch  him".  He 
had  a  good  reputation  which  "went  down  as  he  went  down,"  but 
his  creditors  never  made  inquiry,  it  was  stated,  "as  to  how  he 
went  to  the  bottom  and  became  a  beat."  He  took  sick  and  died 
and  the  county  had  to  bury  him. 

The  failure  of  both  of  these  men  and  their  subsequent  poverty 
and  misfortune  were  all  charged  to  their  dealings  with  an  un- 
scrupulous bank  which  mercilessly  exacted  of  them  usurious  inter- 
est on  small  loans  and  sold  their  chattels  to  satisfy  their  debts 
when  they  were  unable  to  pay  otherwise. 

This  letter  and  many  others  of  a  like  tenor  were  received  by 
Comptroler  Williams  in  commendation  of  his  efforts  to  compel  the 
banks  to  observe  the  law  in  respect  to  interest  charges. 

The  publicity  given  the  activities  of  Comptroller  Williams  in 
connection  with  his  efforts  to  break  up  usurious  interest  prac- 
tices on  the  part  of  the  banks  seemed  to  strike  a  responsive  chord 
in  the  mind  of  every  individual  in  the  country  who  ever  had  any 
difference  with  a  bank  or  was  denied  an  accommodation  or  forced 
to  pay  a  loan,  and  many  letters  were  received  at  the  Comptroller's 
office  of  a  nature  similar  to  that  of  the  Oklahoma  judge. 


ROMANCE  AND  TRAGEDY  OF  BANKING  473 

The  unusual  and  remarkable  feature  in  connection  with  the 
letter  from  the  judge  was  its  publication  in  the  annual  report  of 
the  Comptroller  and  the  implied  authenticity  which  such  publica- 
tion gave  the  allegations  of  the  writer  without  verification  by  in- 
vestigation of  the  details  recited,  or  his  standing  and  reputation 
in  the  community. 

Complaints  against  banks,  of  a  varying  nature,  were  fre- 
quently received  at  the  Comptroller's  office,  and  while  many  of 
them  related  to  transactions  which  did  not  come  under  the  Comp- 
troller's supervision,  as  a  rule,  all  were  investigated,  either  by  cor- 
respondence with  the  banks  or  by  an  examiner  at  the  time  of  his 
regular  examination. 

With  very  few  exceptions  such  complaints  were  found  to  be 
without  justification,  the  transactions  complained  of  coming 
clearly  within  the  rule  of  recognized  banking  practices  or  of  legal 
procedure.  Rarely  were  any  complaints  received  against  banks 
of  the  nature  of  usurious  interest  charges. 

The  practice  was  almost  universal  in  some  sections  of  the 
country  for  banks  to  make  a  minimum  charge  of  from  twenty- 
five  cents  to  one  dollar  on  small  loans  for  short  periods.  It  was 
claimed  by  the  banks  that  such  loans  were  more  of  an  accommoda- 
tion to  the  borrower  than  of  profit  to  the  banks,  and  no  complaints 
were  made  to  the  Comptroller  by  borrowers  of  this  class  that  the 
banks  had  charged  them  excessive  or  unreasonable  rates  for  the 
loans.  To  restrict  the  banks  to  the  legal  rate  of  interest  on  such 
loans,  it  was  claimed,  would  have  required  them  to  make  the  loans 
at  a  loss  or  to  refuse  the  borrower  the  accommodation. 

In  recognition  of  this  fact  the  Comptroller  subsequently  mod- 
ified his  requirements  by  advising  the  banks  that  no  loans  need  be 
reported  on  which  a  minimum  rate  of  not  more  than  fifty  cents 
was  charged. 

The  determination  of  Comptroller  Williams  to  put  an  end  to 
usurious  interest  charges  by  national  banks  was  commendable 
and  met  with  the  approval  of  the  best  elements  in  banking.  But 
the  aspersions  which  were  cast  upon  the  banks  as  a  whole  by  the 
publication  of  the  letter  of  Judge  McNabb  in  his  annual  report 
and  other  statements  of  similar  import  which  appeared  in  the 
public  prints  were  calculated,  to  create  the  impression  that 


474  ROMANCE  AND  TRAGEDY  OF  BANKING 

the  isolated  cases  cited  were  fair  illustrations  of  many  of  a  like 
nature  and  that  the  national  banks  of  the  country  generally  were 
engaged  in  a  nefarious  loan  shark  business,  when  this  condition 
was  far  from  being  the  case. 

If  Mr.  Williams  had  quietly  instructed  the  national  bank  ex- 
aminers to  investigate  at  the  time  of  their  regular  examinations 
and  report  to  him  any  and  all  banks  that  were  engaged  in  the 
practice  of  charging  usurious  and  exorbitant  interest  on  loans 
and  then  required  these  particular  banks  to  discontinue  their  un- 
lawful and  reprehensible  practices  under  the  penalty  of  exposure 
and  prosecution  if  they  did  not  comply,  instead  of  creating  the 
impression  in  the  public  mind  that  nearly  all  the  banks  were  en- 
gaged in  this  practice,  it  was  believed  much  more  beneficial  results 
would  have  been  accomplished  and  the  evil  consequences  of  unwar- 
ranted and  unjust  reflections  upon  the  banks  as  a  whole  would 
have  been  avoided. 


Theft  of  Postage  and  Currency 

In  August,  1915,  the  Treasury  Department  contract  with 
the  express  company,  under  which  national  bank  circulation  for 
many  years  had  been  shipped  to  the  banks,  was  discontinued  and 
all  shipments  thereafter  were  required  to  be  made  by  registered 
mail  insured.  This  change  necessitated  the  use  of  postage  stamps 
on  all  money  packages  shipped  by  the  Comptroller  to  the  banks. 
The  postage  was  furnished  the  Comptroller  by  the  Treasury 
Department  upon  requisition,  and  the  Treasury  was  reimbursed 
by  the  banks  receiving  the  currency. 

This  method  of  affixing  postage  on  currency  shipments  proved 
to  be  unsafe  and  unsatisfactory,  as  it  involved  the  use  of  large 
amounts  of  postage  stamps  and  accounting  therefor,  and  was  soon 
superseded  by  an  arrangement  made  with  the  city  postmaster  to 
have  the  postage  placed  on  the  money  packages  by  the  postmaster 
at  the  branch  post  office  in  the  Treasury  Department.  A  postage 
account  was  opened  with  the  postmaster  and  settlement  made  by 
check  at  the  end  of  each  month  through  the  regular  disbursing 
officer  of  the  Treasury  Department,  thus  avoiding  the  handling  of 
any  cash  or  postage  by  the  employees  of  the  Comptroller's  office. 


ROMANCE  AND  TRAGEDY  OF  BANKING  475 

Some  time  after  this  change  became  effective  the  attention  of 
the  Secret  Service  Division  of  the  Treasury  Department  was 
called  to  the  fact  that  an  employee  of  the  department  had  recent- 
ly made  several  purchases  of  goods  from  a  mail-order  house  in 
Chicago,  paying  for  the  goods  in  postage  stamps  of  the  larger 
denominations. 

Investigation  of  this  complaint  led  to  the  discovery  that  this 
clerk  was  an  employee  of  the  Comptroller's  office  and  had  charge 
of  the  postage  accounts  at  the  time  these  purchases  were  made. 
When  called  upon  to  explain  the  payment  for  his  purchases  in 
postage  stamps  he  admitted  having  appropriated  the  stamps  at 
the  time  he  had  charge  of  the  postage  and  had  stolen  from  time 
to  time  about  $60  worth.  He  explained  that  his  method  of  pro- 
cedure was  to  place  short  postage  on  a  number  of  packages  each 
day  and  appropriate  to  his  own  use  the  amount  of  the  shortage. 

This  man  had  been  a  trusted  employee  of  the  department  for 
a  number  of  years  and  was  one  of  the  clerks  who  had  access  to 
the  money  vaults  of  the  bureau  in  which  a  half  billion  of  dollars 
were  stored. 

Although  a  count  of  the  vaults  had  been  made  only  a  short 
time  previously  it  was  feared  that  he  might  have  stolen  some  na- 
tional bank  notes  after  completion  of  the  count.  The  Comptrol- 
ler therefore  deemed  it  advisable  to  have  a  recount  made  and  at 
his  request  the  Secretary  of  the  Treasury  appointed  a  committee 
of  three  to  make  the  count,  composed  of  one  each  from  the  offices 
of  the  Secretary,  the  United  States  Treasurer  and  the  Comptroller 
of  the  Currency,  with  the  necessary  counters  and  other  clerical 
assistance. 

With  the  exception  of  a  few  minor  discrepancies  between  the 
vault  balances  and  the  books,  which  were  readily  reconciled,  no 
shortage  was  discovered. 

A  few  days  subsequent  to  the  completion  of  this  count  and 
before  the  committee  had  made  up  and  submitted  its  report,  it 
became  necessary  to  reissue  circulation  to  a  certain  bank  on 
account  of  the  redemption  of  some  of  its  notes.  When  the  vault 
package  containing  the  circulation  of  this  bank  was  counted  it 
was  found  to  be  short  ten  sheets  of  fifty  dollars  each.  This  same 
package  had  been  counted  by  the  committee  a  few  days  previously 


476  ROMANCE  AND  TRAGEDY  OF  BANKING 

and  found  to  be  correct  and  no  shipment  had  been  made  therefrom. 
It  was  evident,  therefore,  that  the  missing  sheets  had  been  taken 
between  the  date  of  the  count  and  the  time  the  shortage  was  dis- 
covered, a  period  of  about  two  or  three  days,  and  that  some  one 
connected  with  the  count  had  taken  them. 

The  Secret  Service  Division  of  the  Treasury  Department  was 
immediately  notified  of  the  missing  sheets  and  furnished  with  a 
description  of  the  notes,  and  the  Redemption  Division  of  the 
Treasurer's  office  was  advised  of  the  theft  and  requested  to  look 
out  for  any  of  the  notes  that  might  come  in  for  redemption.  In 
the  course  of  a  few  days  some  of  these  notes  were  received  by  the 
United  States  Treasurer  for  redemption,  having  been  signed  with 
fictitious  names  and  placed  in  circulation  in  Washington,  but  as 
they  were  mingled  with  a  miscellaneous  lot  of  notes  received  from 
different  banks  it  was  impossible  to  obtain  any  clue  to  the  source 
from  which  they  came. 

In  the  meantime  the  secret  service  agents  of  the  department 
had  been  at  work  on  the  case  and  several  employees  who  had 
assisted  in  the  count  were  under  investigation  and  surveillance. 
I  inally  by  the  process  of  elimination  suspicion  was  narrowed  down 
to  one  man  who  was  shadowed  and  caught  in  the  act  of  passing 
one  of  the  notes  in  a  department  store.  He  was  immediately 
placed  under  arrest  and  charged  with  theft  of  the  notes,  some  of 
which  were  found  on  his  person.  He  admitted  his  guilt  and  in- 
formed the  secret  service  agent  where  the  remainder  of  the  notes 
could  be  found  concealed  at  his  home. 

This  man  was  detailed  from  another  bureau  of  the  Treasury 
Department  to  assist  the  committee  in  making  the  count.  He 
had  been  in  the  employ  of  the  department  for  a  number  of  years 
and  was  considered  honest  and  trustworthy,  having  been  previous- 
ly assigned  to  similar  work  several  times.  He  was  quick  to  ob- 
serve the  defective  system  employed  in  making  the  count  and  to 
take  advantage  of  its  weakness.  Fortunately,  however,  very 
shortly  after  the  package  containing  the  missing  sheets  was 
counted  it  became  necessary  to  ship  some  currency  to  this  par- 
ticular bank  in  reissue  of  circulation  redeemed,  which  disclosed  the 
shortage.  Had  no  shipment  been  made  that  bank  for  some  time 
after  completion  of  the  vault  count  it  would  have  been  impossible 


ROMANCE  AND  TRAGEDY  OF  BANKING  477 

to  account  for  the  missing  notes  or  the  manner  of  their  disappear- 
ance and  suspicion  would  have  fallen  upon  all  of  the  regular  vault 
clerks  of  the  division,  as  it  would  have  been  assumed  that  the 
sheets  were  taken  or  in  some  unaccountable  way  disappeared 
after  the  committee  had  verified  the  vault  balance  and  completed 
its  work. 

No  one  was  quicker  to  realize  this  fact  than  the  thief  who  stole 
the  money.  He  gambled  on  the  possibility  of  escape  from  sus- 
picion or  detection,  took  the  chance  and  lost.  He  was  indicted 
and  admitted  his  guilt,  but  escaped  the  penalty  of  his  wrongdoing 
by  being  paroled  by  the  court  instead  of  being  sentenced  to  a 
term  in  the  penitentiary. 

Almost  immediately  following  the  disposition  of  this  case  an- 
other very  suspicious  circumstance  was  accidentally  brought  to 
light  which  upon  investigation  disclosed  a  further  shortage 
through  an  entirely  different  source. 

In  the  rearrangement  of  the  contents  of  the  shelves  in  the 
office  file  room  in  the  sub-basement  of  the  Treasury  to  make  space 
for  additional  stock,  nineteen  sheets  of  incomplete  national  bank 
circulation,  amounting  to  $950,  were  found  concealed  under  some 
old  record  books.  How  long  these  notes  had  been  hidden  there  or 
what  the  original  sum  amounted  to  never  was  definitely  ascer- 
tained. But  these  particular  notes  were  part  of  the  last  package 
of  eight  hundred  sheets  of  new  circulation  in  the  vaults  of  the 
Comptroller  for  a  bank  whose  charter  had  been  extended  several 
months  previously. 

When  the  charter  of  a  national  bank  is  extended  a  new  series 
of  notes  was  then  required  by  law  to  be  issued,  of  a  design  readily 
distinguishable  from  the  notes  issued  to  the  bank  before  extension, 
and  the  cancellation  and  destruction  of  all  the  old  notes. 

The  office  record  of  the  amount  of  old  circulation  in  the 
vaults  to  the  credit  of  this  particular  bank  had  been  changed 
so  as  not  to  show  the  receipt  from  the  Bureau  of  Engraving  and 
Printing  of  the  stolen  sheets. 

The  notes  on  hand  for  this  bank,  of  the  old  series,  were  care- 
fully checked  against  the  record  as  previously  changed  and  found 
to  agree,  but  subsequently  it  was  ascertained  that  a  number  of 
the  notes  of  this  same  series  had  been  placed  in  circulation  with 


478          ROMANCE  AND  TRAGEDY  OP  BANKING 

forged  signatures  of  the  president  and  cashier  of  the  bank  and 
apparently  with  no  attempt  whatever  to  disguise  the  handwriting 
of  the  forgers  or  to  imitate  the  signatures  of  the  officers. 

A  year  or  more  before  these  occurrences  the  chief  of  the  issue 
division  of  the  Comptroller's  office  was  stricken  with  paralysis 
and  was  incapacitated  for  duty  for  several  months.  While  he 
never  fully  recovered  from  this  attack,  in  the  course  of  time  he  got 
sufficiently  well  to  return  to  the  office  and  supervise  the  work  of 
his  division. 

During  the  progress  of  investigation  of  this  matter  this  chief 
had  a  second  stroke  of  paralysis  and  while  confined  to  his  home 
from  this  attack  committed  suicide  by  shooting  himself. 

This  man  had  been  employed  in  the  Comptroller's  office  for 
nearly  a  half  century.  He  was  a  veteran  of  the  Civil  War  and  a 
member  of  the  famous  "Iron  Brigade"  of  Michigan.  During  the 
greater  part  of  his  service  in  the  bureau  he  held  positions  of  trust 
and  responsibility.  At  one  time  he  was  chief  clerk  of  the  office. 
For  many  years  and  up  to  the  time  of  his  death  the  money  vaults 
of  the  bureau  were  in  his  charge,  containing  at  times  as  much  as 
a  half  billion  dollars.  Every  Comptroller  under  whom  he  served 
had  absolute  confidence  in  his  integrity  and  honesty.  He  was  a 
man  of  excellent  habits  and  of  good  moral  character.  Of  the 
entire  force  of  his  division  he  was  probably  the  last  person  upon 
whom  the  slightest  suspicion  of  dishonesty  or  wrongdoing  would 
rest,  and  when  information  of  his  suicide  reached  the  office,  al- 
though the  investigation  of  the  forgery  and  circulation  of  these 
notes  was  then  in  progress,  he  was  not  even  then  suspected  of 
being  concerned.  Subsequent  disclosures,  however,  furnished 
such  conclusive  evidence  that  he  not  only  committed  the  forgeries 
and  put  the  notes  in  circulation,  but  had  manipulated  and  falsi- 
fied the  records  in  an  endeavor  to  conceal  his  crime.  The  evidence 
was  so  convincing  that  his  family  unhesitatingly  made  good  the 
loss  to  the  Government  to  the  extent  of  their  financial  ability. 

With  the  memory  of  his  long  and  previously  good  record  in 
the  service  of  the  department  it  was  the  charitable  belief  of  those 
who  knew  him  and  were  familiar  with  these  facts,  that  he  was 
mentally  irresponsible  at  the  time  he  committed  this  crime  as  a 
result  of  paralysis,  from  the  effects  of  which  he  suffered  two  or 


ROMANCE  AND  TRAGEDY  OF  BANKING  479 

three  years  before  his  death,  and  that  his  knowledge  of  the  fact 
that  the  matter  was  under  investigation  with  the  certainty  of  de- 
tection, led  him  to  self-destruction. 


Suit  to  Enjoin  Comptroller 

On  May  1,  1919,  the  First  National  Bank  of  Canton,  Penn- 
sylvania, brought  suit  in  equity  for  an  injunction  against  John 
Skelton  Williams,  individually,  not  as  Comptroller  of  the  Cur- 
rency, in  the  District  Court  of  the  United  States  for  the  Middle 
District  of  Pennsylvania.  On  the  day  the  suit  was  instituted  the 
court  issued  a  temporary  injunction  and  also  a  rule  against  the 
defendant  to  appear  on  May  9,  1919,  and  show  cause  why  a  pre- 
liminary injunction  should  not  issue.  On  the  return  day  of  the 
rule,  which  had  in  the  meantime  been  continued  to  May  19th,  a 
motion  to  dismiss  for  want  of  process  was  urged  by  the  Depart- 
ment of  Justice,  appearing  for  the  Comptroller,  who  declined  to 
enter  a  general  appearance  until  this  question  had  been  passed 
upon  by  the  court.  Complainants  were  permitted  to  amend  their 
bill  so  as  to  name  the  Comptroller  of  the  Currency  in  his  official 
capacity  as  defendant,  the  original  complaint  describing  him  as 
"claiming  to  be  and  exercising  the  powers  of  the  Comptroller  of 
the  Currency".  On  May  20th  the  court  announced  that  it  would 
overrule  defendant's  motion,  but  might  reinstate  it  upon  further 
consideration.  With  proper  reservations  affidavits  were  filed  by 
return  to  the  rule  and  a  motion  was  made  to  dismiss  the  bill  for 
want  of  jurisdiction,  for  lack  of  equity  and  for  other  causes.  The 
case  was  fully  argued  by  both  sides  and  submitted  on  May  20, 
1919.  The  court  reserved  its  decision  and  continued  the  injunc- 
tion in  effect. 

On  October  12,  1919,  an  order  was  entered  dismissing  the 
bill  on  motion  made  by  defendant,  appearing  specially,  on  the 
ground  that  process  had  not  been  legally  served,  and  from  this 
action  of  the  court  complainants  appealed  to  the  Supreme  Court 
of  the  United  States.  The  Supreme  Court,  on  April  19,  1920,  re- 
versed the  District  Court  on  the  question  of  process  and  the  case 
was  remanded  to  the  District  Court. 


480          ROMANCE  AND  TRAGEDY  OF  BANKING 

On  a  special  trial  of  the  case  additional  affidavits  and  briefs 
were  filed  and  the  matter  finally  placed  on  the  court  calendar  for 
argument  October  6,  1920.  It  was  subsequently  continued  until 
December  16,  1920,  when  it  was  fully  argued  and  resubmitted. 
During  the  course  of  the  argument  the  court's  attention  was 
called  to  the  fact  that  in  the  near  future  the  defendant  would 
retire  from  the  office  of  Comptroller  of  the  Currency,  and  that  it 
was  very  important,  because  of  the  questions  involved,  that  a 
decision  be  rendered  before  that  time.  The  court  again  took  the 
case  under  consideration. 

On  March  2,  1921,  the  defendant  resigned  as  Comptroller  of 
the  Currency,  and  on  March  31st  a  decree  dismissing  the  bill  for 
want  of  a  proper  defendant  to  stand  in  judgment  was  entered,  and 
the  injunction,  of  course,  ceased  therewith  to  be  in  effect. 

Mr.  Louis  T.  McFadden,  a  Representative  in  Congress  from 
Pennsylvania,  and  chairman  of  the  Banking  and  Currency  Com- 
mittee of  the  House  of  Representatives,  was  president  of  this  bank. 

For  a  year  or  more  before  the  institution  of  the  suit  by  the 
First  National  Bank,  the  bank  had  been  in  a  very  unsatisfactory 
condition,  so  much  so  that  it  was  necessary  to  place  it  on  the 
special  list  for  frequent  examination.  This  fact  seemed  to  exas- 
perate the  president,  Mr.  McFadden,  to  such  an  extent  as  to 
impel  him  to  make  a  personal  attack  upon  Mr.  Williams  on  the 
floor  of  the  House  of  Representatives,  in  the  course  of  which  he 
impugned  the  Comptroller's  motives  for  placing  his  bank  on  the 
special  list  and  subjecting  it  to  the  annoyance  of  frequent  exami- 
nations. He  also  introduced  a  bill  for  the  abolition  of  the  office 
of  Comptroller  of  the  Currency,  and  the  merger  of  the  Currency 
Bureau  with  the  Federal  Reserve  Board. 

To  a  man  of  Mr.  Williams'  controversial  tendencies,  the  action 
of  Mr.  McFadden  was  equivalent  to  a  challenge  to  combat,  which 
he  very  readily  accepted,  with  the  result  that  a  long  and  bitter 
personal  controversy  followed,  and  was  given  broad  publicity. 

It  was  alleged  in  the  bill  of  particulars  filed  by  the  bank  in 
the  suit  to  enjoin  the  Comptroller  that,  in  order  to  injure  the 
complainant's  president,  toward  whom  he  entertained  personal 
ill  will,  the  Comptroller  determined  to  destroy  the  bank's  business, 
and  to  that  end  he  had  maliciously  persecuted  and  oppressed  it 


ROMANCE  AND  TRAGEDY  OF  BANKING  481 

for  three  years,  in  the  following  ways  among  others:  By  often 
demanding  special  reports  and  information  beyond  the  powers 
conferred  upon  him  by  law;  by  disclosing  confidential  and  official 
information  concerning  it  to  banks,  members  of  Congress,  repre- 
sentatives of  the  press,  and  the  public  generally,  by  inciting  litiga- 
tion against  the  bank  and  its  officers ;  by  publishing  and  dissemi- 
nating false  statements,  charging  the  bank  with  unlawful  acts 
and  improper  conduct  and  reflecting  upon  its  solvency;  and  by 
distributing  among  its  depositors,  stockholders  and  others  alarm- 
ing statements  intending  to  affect  its  credit,  etc.  And  further, 
that  unless  restrained,  he  would  continue  these  and  similar  ma- 
licious and  oppressive  practices. 

It  will  be  noted  from  the  foregoing  that  the  complainant  in 
this  bill  charged  Comptroller  Williams  with  being  actuated  by 
personal  ill  will  towards  the  bank,  whose  business  he  had  sought 
to  destroy  and  had  maliciously  persecuted  and  oppressed  the 
bank  for  three  years,  immediately  previous  to  the  institution  of 
the  suit  to  enjoin  him.  But  as  a  matter  of  fact,  and  in  justice  to 
Mr.  Williams,  it  should  be  stated  that  he  had  nothing  whatever 
to  do  with  the  criticisms  of  this  bank  by  the  Comptroller's  office, 
or  with  directing  the  frequent  examinations  into  its  condition  by 
national  bank  examiners,  until  long  after  the  bank  had  been 
placed  on  what  was  known  as  the  "special  list,"  because  of  its 
unsatisfactory  condition,  as  will  be  seen  by  the  following  affidavit 
made  by  Thomas  P.  Kane,  the  Deputy  Comptroller  of  the  Cur- 
rency, filed  in  the  case : 

I,  Thomas  P.  Kane,  Deputy  Comptroller  of  the  Cur- 
rency, being  duly  sworn,  depose  as  follows:  I  have  been 
connected  with  the  office  of  the  Comptroller  of  the  Cur- 
rency in  Washington  for  over  thirty-two  years,  to  wit,  since 
June,  1886.  In  June,  1899,  I  was  appointed  Deputy  Comp- 
troller of  the  Currency,  and  have  held  that  position  con- 
tinuously since  that  date,  during  which  time  there  have  been 
four  Comptrollers  of  the  Currency,  namely,  Charles  G. 
Dawes,  William  B.  Ridgely,  Lawrence  O.  Murray  and 
John  Skelton  Williams.  Pending  a  vacancy  in  the  office 
from  April  23,  1913,  to  February  2.  1914.  I  held  the 
position  of  Acting  Comptroller.  During  this  entire  period 


482  ROMANCE  AND  TRAGEDY  OF  BANKING 

I  have  had  immediate  supervision  of  all  correspondence  with 
national  banks  based  upon  the  reports  of  examinations  made 
by  national  bank  examiners. 

The  records  of  the  Comptroller's  office  show  that  the 
First  National  Bank  of  Canton,  Pa.,  has  been  criticised 
for  violations  of  law,  irregularities,  and  unsatisfactory 
conditions  by  every  one  of  the  Comptrollers  above  named 
and  by  myself  as  Acting  Comptroller,  said  criticisms 
being  based  on  the  reports  of  at  least  four  different  ex- 
aminers. The  subject  matter  of  these  criticisms  varied  and 
consisted  of  excessive  loans,  real  estate  unlawfully  held, 
improper  cash  items,  defective  bookkeeping  methods,  un- 
lawful investment  in  or  purchase  of  stock,  statutory  bad 
debts,  concentration  of  loans  to  allied  interests  of  the 
president,  and  excessive  liabilities  of  directors  and  other 
interests. 

I  first  called  the  attention  of  John  Skelton  Williams, 
Comptroller  of  the  Currency,  to  the  condition  of  the  First 
National  Bank  of  Canton,  Pa.,  in  December,  1918.  Prior 
to  that  time  all  the  office  correspondence  with  that  bank  in 
regard  to  its  condition  was  conducted  by  me  without  con- 
sultation in  any  respect  with  the  Comptroller.  After  the 
examination  of  the  bank  made  by  National  Bank  Examiner 
Kinzie  B.  Cecil  on  June  28,  1917,  by  my  direction  it  was 
placed  on  what  is  known  as  the  special  list  for  frequent 
examination,  and  I  advised  the  directors  of  this  fact,  and 
that  it  would  be  continued  on  the  special  list  until  all  un- 
lawful practices  were  discontinued  and  unsatisfactory  con- 
ditions corrected.  This  same  course  was  pursued  in  the 
case  of  every  other  national  bank  which  was  reported  by 
the  national  bank  examiner  to  be  violating  the  law  or  in 
an  unsatisfactory  condition,  and  no  exception  was  made  in 
the  case  of  the  First  National  Bank  of  Canton,  Pa.  This 
bank  was  not  placed  on  the  special  list  by  direction  of  the 
Comptroller,  as  alleged  by  complainant,  and  I  never  con- 
ferred with  him  in  regard  to  this  bank  until  December, 
1918,  when  National  Bank  Examiner  John  K.  Woods,  in 
his  report  of  examination  of  the  First  National  Bank  of 
Canton,  Pa.,  made  on  November  20,  1918,  suggested  that 
Mr.  Louis  T.  McFadden,  president  of  the  bank,  and 
Charles  A.  Innes,  cashier,  be  requested  to  come  to  Wash- 
ington for  a  conference  with  the  Comptroller.  I  then  con- 


ROMANCE  AND  TRAGEDY  OF  BANKING  483 

ferred  with  the  Comptroller  in  regard  to  the  condition  of 
the  bank,  and  told  him  how  long  it  had  been  on  the  special 
list  and  arranged  with  him  for  a  conference  with  Mr. 
McFadden  and  Mr.  Innes  at  his  office.  I  also  informed 
him  at  that  time  that  Mr.  McFadden,  the  president  of 
the  bank,  was  a  Representative  in  Congress  and  a  member 
of  the  Banking  and  Currency  Committee  of  the  House 
of  Representatives.  I  did  not  discuss  with  the  chief 
examiner  or  with  the  Comptroller  the  selection  of  any 
examiner  or  examiners  to  make  the  examinations  of  this 
bank  nor  did  I  receive  any  instructions  from  the  Comp- 
troller as  to  the  selection  of  such  examiner.  The  examina- 
tions were  made  by  examiners  who  were  on  duty  in 
Pennsylvania  at  that  time. 

This  bank  had  been  subject  to  criticism  for  a  number 
of  years  and  was  placed  on  the  special  list  on  account 
of  its  generally  unsatisfactory  condition,  due  to  excessive 
loans,  shortage  in  reserve,  unlawful  real  estate  holdings, 
slow  and  unsatisfactory  loans,  irregular  cash  items,  un- 
satisfactory methods  in  reconciling  bank  balances,  and 
persistent  disregard  of  the  law  and  admonitions  of  the 
Comptroller's  office,  and  not  because  of  "one  small  ex- 
cessive loan"  as  alleged  by  the  complainant  in  the  bill 
filed  in  the  case  of  First  National  Bank  of  Canton  v. 
John  Skelton  Williams. 

The  suggestion  in  office  letter  of  May  24,  1918,  ad- 
dressed to  the  board  of  directors  of  the  First  National 
Bank  of  Canton,  and  signed  by  the  Deputy  Comptroller, 
to  the  effect  that — "if  president  McFadden  is  not  in- 
clined to  observe  the  instructions  of  this  office  and  the 
law  he  should  be  required  to  resign  and  the  board  should 
elect  some  one  else  as  president  who  will,"  was  not 
"made  with  the  view  to  prejudicing  the  officers  of  the 
complainant  against  its  president,  McFadden,  and  for 
the  purpose  of  forcing  his  removal  as  the  complainant's 
president  and  visit  upon  him  the  disgrace  thereto,"  as 
alleged  in  complainant's  bill,  but  was  a  suggestion  such 
as  is  frequently  made  to  boards  of  directors  of  banks 
whose  officers  persist  in  disregarding  the  instructions  of 
the  Comptroller's  office  to  discontinue  violations  of  law  and 
to  correct  irregularities.  This  suggestion  is  also  made 
for  the  purpose  of  placing  the  responsibility  upon  boards 


4S4 

of  directors  for  continuance  in  office  of  any  officer  of  the 
bank  who  is  shown  to  have  deliberately  and  persistently 
violated  the  law  and  is  responsible  for  the  bank's  unsatis- 
factory condition. 

The  Comptroller  had  nothing  whatever  to  do  with  the 
writing  of  the  letter  of  May  24,  1918,  either  by  way  of 
dictation,  suggestion,  or  otherwise,  and  never  saw  the 
letter  or  had  any  knowledge  of  its  having  been  written 
until  after  the  conference  with  Mr.  McFadden  in  Wash- 
ington on  January  7,  1919. 

It  should  be  apparent  from  the  foregoing  that  the  frequent 
examinations  of  this  bank  and  the  special  reports  and  informa- 
tion called  for  by  the  Comptroller  of  the  Currency  from  time  to 
time  were  not  made  because  of  the  personal  ill  will  entertained 
by  Mr.  Williams  toward  the  president  of  the  bank,  as  alleged  in 
the  complainant's  bill,  but  were  made  necessary  by  reason  of  the 
continued  unsatisfactory  condition  of  the  bank  and  the  attitude 
of  the  dominant  management  who,  because  of  the  fact  that  he 
was  a  member  of  Congress,  seemed  to  be  under  the  impression  that 
he  was  superior  to  law  and  the  regulations  of  the  Comptroller  of 
the  Currency. 

It  is  greatly  to  be  regretted  that  the  hearing  of  this  complaint 
was  not  pushed  to  a  conclusion  and  a  decision  rendered  by  the 
court  because  of  the  importance  of  the  question  involved  in  the 
administration  of  the  Comptroller's  office  and  his  supervisory 
powers  over  the  national  banks,  but  the  resignation  of  Mr.  Wil- 
liams on  March  2,  1921,  brought  the  case  to  an  abrupt  termina- 
tion without  decision. 

Last  Official  Act  of  Comptroller  Williams 

One  of  the  last  official  acts  of  Comptroller  Williams  on  the 
eve  of  his  retirement  from  office  was  to  make  a  call  upon  the 
national  banks  for  a  report  of  their  condition  at  the  close  of  busi- 
ness February  21,  1921,  fifty-four  days  after  the  last  previous 
report  of  December  29,  1920,  the  sixth  report  for  that  year. 

The  call  for  February  21  required  the  banks  to  show  the  ag- 
gregate amount  of  salaries  or  compensation  paid  the  officers  of 


ROMANCE  AND  TRAGEDY  OF  BANKING  485 

the  banks  for  the  month  of  January,  1921,  the  annual  pay  of  all 
the  officers  and  the  number  of  officers  on  the  date  of  the  report. 

As  the  law  required  reports  of  condition  to  be  published  in  the 
same  form  in  which  they  were  made  to  the  Comptroller  it  followed 
that  the  information  in  regard  to  salaries  paid  must  necessarily  be 
shown  in  the  published  statements  of  the  banks. 

Many  of  the  banks  objected  most  strenuously  by  letter  and  by 
wire  to  this  requirement  and  requested  its  modification  to  the  ex- 
tent at  least  of  relieving  them  of  the  necessity  of  publishing  these 
items,  claiming  that  no  public  good  would  be  accomplished  by  their 
publication. 

Banks  in  the  smaller  communities,  whose  officers  were  limited 
to  a  president  and  a  cashier  only,  objected  to  making  known  to 
everybody  in  the  town  the  amount  of  compensation  paid  to  their 
officers. 

Clearing  house  associations  in  some  of  the  larger  cities  met 
and  after  considering  the  question  were  reported  as  having  advised 
their  member  banks  not  to  furnish  the  information,  or,  if  fur- 
nished, not  to  include  it  in  their  published  statements. 

The  general  counsel  for  the  American  Bankers'  Association 
was  appealed  to  for  an  opinion  as  to  whether  the  compensation 
paid  to  officers  and  employees  was  a  resource  or  liability  within 
the  meaning  of  Section  5211  of  the  Revised  Statutes  of  the  United 
States,  such  as  the  Comptroller  of  the  Currency  was  empowered 
to  call  for  under  authority  of  said  section  and  as  the  banks  were 
required  to  furnish  and  publish  in  their  statements  of  condition. 

In  reply  to  this  request  counsel  of  the  association  rendered  a 
written  opinion  as  follows : 

Section  5211  requires  five  reports  each  year  to  the 
Comptroller  "according  to  the  form  which  may  be  pre- 
scribed by  him"  and  "each  such  report  shall  exhibit,  in 
detail  and  under  appropriate  heads,  the  resources  and 
liabilities  of  the  Association,"  etc.  The  report  must  be 
published  "in  the  same  form  in  which  it  is  made  to  the 
Comptroller." 

The  Supreme  Court  of  the  United  States  in  Cochran  v. 
U.  S.  15  Supreme  Court  Reporter  628  says  that  the  object 
of  Section  5211  is  "to  apprise  the  Comptroller  of  the 


486          ROMANCE  AND  TRAGEDY  OF  BANKING 

Currency  and  the  public  of  the  condition  of  each  national 
bank  at  stated  periods." 

In  my  opinion  a  statement  of  salaries  paid,  does  not 
come  within  the  spirit  and  meaning  of  Section  5211;  it 
is  not  the  character  of  information  which  the  law  requires 
shall  be  reported  upon  call  of  the  Comptroller  and  pub- 
lished. It  is  not  a  statement  of  what  the  bank  owns  or 
what  it  owes — its  resources  and  liabilities — and  a  report 
and  publication  of  such  salaries  would  in  no  way  fulfill 
the  object  of  Section  5211  which  as  declared  by  the 
Supreme  Court  is,  as  already  said,  to  apprise  the  Comp- 
troller and  the  public  of  the  bank's  condition  at  stated 
periods.  The  Comptroller's  authority  is  measured  by  law — 
he  cannot  go  beyond  the  law  and  this  is  simply  an  authority 
to  call  for  a  report  of  resources  and  liabilities  so  that  he 
and  the  public  may  know  the  condition  of  the  bank.  When 
he  goes  beyond  this  and  demands  the  publication  of  addi- 
tional information  of  a  confidential  character,  he  is,  in  my 
opinion  proceeding  without  authority  of  law. 

True,  Section  5211  also  provides  for  special  reports  to 
enable  the  Comptroller  to  acquire  "a  full  and  complete 
knowledge  of  its  (the  bank's)  condition."  But,  assum- 
ing the  authority  to  require  these  special  reports  would 
cover  a  wider  latitude  of  information,  there  is  no  re- 
quirement for  publication  in  such  case. 

I  am,  therefore,  inclined  to  the  opinion  that  a  report 
of  the  compensation  paid  to  officers  and  employees  is  not 
a  report  of  the  resources  and  liabilities  and  that  the  Comp- 
troller of  the  Currency  has  no  power  to  force  the  reporting 
banks  to  publish  this  confidential  information. 

Concerning  the  penalty  for  failure  to  make  reports,  Section 
5213  Revised  Statutes  imposes  a  penalty  of  $100  a  day 
for  failure  to  make  and  transmit  the  required  report;  but 
this  Section  contains  no  penalty  for  failure  to  comply  with 
the  provision  of  the  Act  that  the  report  must  be  published 
in  the  same  form  in  which  it  is  made  to  the  Comptroller. 
Even  assuming  there  was  authority  to  require  publication 
of  this  information,  which  I  very  much  doubt,  the  only 
penalty  for  non-publication  would  be  the  general  penalty 
provided  by  Revised  Statutes  Section  5239  of  forfeiture 
of  the  franchise  but  a  prerequisite  to  such  forfeiture  is 


ROMANCE  AND  TRAGEDY  OF  BANKING  487 

judgment  of  a  court  in  a  suit  brought  for  the  purpose  by 
the  Comptroller  of  the  Currency. 

Most  of  the  protests  that  were  filed  against  furnishing  this 
information  or  requests  for  a  modification  of  the  requirements 
were  received  at  the  Currency  Bureau  after  Mr.  Williams  had  re- 
tired from  office,  and  during  the  period  of  fifteen  days  intervening 
between  his  retirement  and  the  appointment  and  qualification  of 
his  successor  the  office  was  in  charge  of  the  Deputy  Comptroller 
as  Acting  Comptroller  and  the  consideration  and  disposition  of 
these  protests  therefore  devolved  upon  him.  A  new  administra- 
tion had  taken  charge  of  the  affairs  of  Government  and  a  new 
Secretary  of  the  Treasury  had  just  been  inducted  into  office.  It 
was  believed  that  neither  the  President  nor  the  Secretary  of  the 
Treasury  was  in  sympathy  with  the  requirement  of  the  retired 
Comptroller  and  there  was  some  doubt  as  to  his  authority  to 
require  the  banks  to  make  and  publish  in  a  report  of  condition 
the  compensation  paid  their  officers,  which  it  was  contended  was 
not  a  resource  or  liability.  The  Acting  Comptroller  therefore  sub- 
mitted the  opinion  of  the  general  counsel  of  the  American  Bankers' 
Association  to  the  Comptroller's  counsel,  with  a  request  for  his 
views  and  interpretation  of  the  law  on  the  subject,  who  rendered 
an  opinion  as  follows : 

At  the  recent  call  made  by  the  Comptroller  of  the  Cur- 
rency on  national  banking  associations  for  a  report  of  con- 
dition, the  associations  were  asked  to  report  on  the  form 
prescribed  the  aggregate  amount  of  salaries  paid  to  of- 
ficers and  employees.  You  request  my  opinion  as  to 
whether  the  Comptroller  can  compel  the  reporting  banks 
to  publish  this  information. 

This  call  was  made  under  the  provisions  of  Section  5211 
Revised  Statutes  of  the  United  States,  which  required  not 
less  than  five  reports  to  be  made  each  year  by  national 
banking  associations  to  the  Comptroller  of  the  Currency 
according  to  the  form  which  may  be  prescribed  by  him. 
"Each  such  report  shall  exhibit,  in  detail  and  under  ap- 
propriate heads,  the  resources  and  liabilities  of  the  associa- 
tion at  the  close  of  business  on  any  past  day  by  him 
specified;  and  shall  be  transmitted  to  the  Comptroller 


488 


within  five  days  after  the  receipt  of  a  request  or  requisition 
therefor  from  him,  and  in  the  same  form  in  which  it  is 
made  to  the  Comptroller  shall  be  published  in  a  newspaper 
*  *  *  at  the  expense  of  the  association ;  *  *  * 

Section  5213  imposes  a  penalty  on  the  association  for 
failure  to  make  and  transmit  such  reports  to  the  office  of 
the  Comptroller  within  the  time  prescribed  but  no  penalty 
is  provided  in  said  section  for  failure  to  publish  the 
report. 

It  is  contended  that  the  aggregate  sum  paid  officers  and 
employees  of  a  bank  for  salaries  is  not  a  part  of  the  bank's 
resources  or  liabilities  and  therefore  the  Comptroller  has  no 
authority  in  law  to  call  for  this  information  in  a  report  of 
condition  which  requires  publication  and  that  if  such  in- 
formation can  be  at  all  required  it  must  be  obtained  by 
special  reports  which  are  also  provided  for  by  Section 
5211  and  which  reports  are  not  required  to  be  published. 

I  am  not  satisfied  that  this  is  a  correct  interpretation 
of  Section  5211.  It  might  very  reasonably  be  contended 
that  salaries  paid  or  contracted  for  which  are  excessive 
or  out  of  proportion  to  the  business  of  the  bank  or  to  its 
earning  capacity  would  essentially  affect  its  resources,  but 
in  the  absence  of  a  judicial  determination  I  regard  the 
question  involved  in  doubt  and  do  not  consider  it  necessary 
to  be  determined  to  comply  with  your  request. 

If %  the  banks  are  satisfied  that  such  information  cannot 
legally  be  required  of  them  in  their  reports  of  condition 
when  called  for  by  the  Comptroller  they  may  decline  to 
give  the  information  and  have  the  question  determined  by 
the  courts  should  the  penal  provisions  of  the  statute  be 
attempted  to  be  enforced  against  them. 

If,  however,  the  banks  give  the  information  as  requested 
on  the  form  prescribed  and  transmit  the  reports  to  the 
Comptroller  I  am  of  opinion  that  the  reports  must  be 
published  as  made  and  transmitted. 

The  language  of  the  statute  is  explicit  requiring  the 
report  to  be  "transmitted  to  the  Comptroller  within  five 
days  after  the  receipt  of  a  request  or  requisition  therefor 
from  him  and  in  the  form  in  which  it  is  made  to  the 
Comptroller  shall  be  published  in  a  newspaper  *  *  *" 

Section  5213  provides  no  penalty  for  failure  on  the  part 
of  the  bank  to  publish  the  report  as  made,  nor  does  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  489 

statute  in  terms  require  the  bank  to  cause  its  publication. 
It  only  provides  that  it  shall  be  published  "at  the  expense 
of  the  association"  and  while  it  has  been  the  practice  for 
the  banks  to  make  the  publication  there  appears  no  reason 
why  the  publication  cannot  be  made  by  the  Comptroller  at 
the  expense  of  the  association. 

While  it  is  true  that  the  statute  does  not  in  terms  require  the 
banks  to  cause  the  publication  of  their  statements  to  be  made,  it 
is  unreasonable  to  suppose  that  it  intended  otherwise,  as  it  would 
be  wholly  impracticable  for  the  Comptroller  to  undertake  to  pub- 
lish the  statement  of  each  bank  at  the  expense  of  the  bank  in  the 
local  newspaper  published  in  the  city  or  town  of  the  location  of  the 
bank  as  required  by  law. 

One  important  fact  in  the  requirement  of  the  Comptroller 
seems  to  have  been  overlooked  by  those  who  contended  that  the 
compensation  of  officers  of  the  banks  was  not  a  resource  or  liabil- 
ity, and  therefore  the  Comptroller  was  without  authority  under 
Section  5211  of  the  Revised  Statutes  to  require  this  item  to  be 
shown  in  a  report  of  condition. 

The  report  blank  prescribed  by  the  Comptroller  for  this  par- 
ticular call  did  not  include  the  compensation  of  officers  with  the 
items  to  be  shown  as  a  resource  or  liability,  but  made  a  special 
item  of  this  matter  below  the  total  footings,  so  that  the  banks 
could  have  furnished  the  information  in  their  reports  and  pub- 
lished their  resources  and  liabilities  in  the  same  form  in  which 
they  were  made  to  the  Comptroller  without  showing  this  item. 

There  really  was  no  necessity,  however,  for  the  Comptroller  to 
have  called  for  this  information  for  the  use  of  the  office,  as  the 
salaries  of  officers  and  employees  of  the  banks  are  shown  in  the 
reports  of  national  bank  examiners  at  the  time  of  each  examina- 
tion of  a  bank.  It  would  seem,  therefore,  that  as  this  information 
was  already  in  the  possession  of  the  Comptroller's  office  the  only 
purpose  in  calling  for  it  in  the  reports  of  condition  must  have 
been  to  secure  its  publication. 

While  there  was  some  doubt  in  the  mind  of  the  Acting  Comp- 
troller as  to  the  authority  of  the  Comptroller  to  require  the  banks 
to  show  in  their  reports  of  condition  the  amount  of  salaries  paid 


490          ROMANCE  AND  TRAGEDY  OF  BANKING 

their  officers  he  did  not  deem  it  advisable  to  formally  rescind  the 
order,  especially  in  view  of  the  fact  that  at  this  stage  of  the  sit- 
uation the  nomination  of  a  successor  to  Comptroller  Williams  had 
been  sent  to  the  United  States  Senate,  which  it  was  expected 
would  be  confirmed  in  a  day  or  two. 

In  the  meantime  before  the  new  Comptroller's  confirmation 
and  qualification  nearly  all  of  the  reports  of  condition  of  the 
banks  and  certificates  of  publication  had  been  received  at  the 
Comptroller's  office  and  the  disturbing  effect  of  the  Comptroller's 
requirement  had  subsided.  It  was  therefore  concluded  to  let  the 
matter  rest  and  accept  the  reports  and  published  statements  as 
rendered. 


DANIEL  R.  CRISSINGER 
Comptroller  of  the  Currency,  appointed  1921 


CHAPTER  XVII 

Daniel  Richard  Crissinger 

DANIEL  RICHARD  CRISSINGER,  the  fourteenth  Comp- 
troller of  the  Currency,  was  nominated  by  President 
Harding  to  succeed  John  Skelton  Williams,  March  10, 
1921,  and  assumed  charge  of  the  bureau  March  17  following.  He 
was  a  fellow  townsman  and  a  life-long  friend  and  neighbor  of  the 
President. 

Mr.  Crissinger  was  born  December  10,  1860,  in  a  log  cabin 
in  Tully  township,  Marion  County,  Ohio.  He  was  educated  in 
the  common  schools  of  Caledonia,  Ohio,  and  was  graduated  from 
the  Caledonia  High  School  in  1880.  He  taught  one  year  in  the 
grade  schools  of  Caledonia,  and  one  year  as  assistant  in  the  high 
school  of  that  town,  while  finishing  his  high  school  studies. 

He  entered  Buchtel  College  at  Akron,  Ohio,  in  September, 
1881,  and  was  graduated  from  that  college  with  the  degree  of 
B.  S.  in  June,  1885.  He  took  up  the  study  of  law  in  the  office  of 
Judge  William  Z.  Davis  at  Marion,  Ohio,  in  July,  1885,  as  a 
student  and  read  law  with  Judge  Davis  until  October,  1885, 
when  he  entered  the  law  school  at  the  University  of  Cincinnati, 
and  was  graduated  with  a  class  of  one  hundred  and  fifteen  in 
June,  1886,  when  he  returned  to  Marion  and  entered  a  partner- 
ship with  Judge  Davis,  his  preceptor,  in  1886. 

He  was  elected  prosecuting  attorney  in  1888  and  was  re- 
elected  in  1891.  In  1893,  while  still  prosecuting  attorney,  he 
was  elected  city  solicitor  of  Marion,  Ohio,  and  was  re-elected  in 
1895  and  again  in  1897.  He  was  nominated  for  Congress  in  1904 
and  in  1906  on  the  Democratic  ticket.  He  entered  into  a  part- 
nership with  John  A.  Wolford  in  the  practice  of  law  in  1896, 
which  partnership  continued  until  Mr.  Wolford's  death  in  1898. 
Two  years  later  he  entered  a  partnership  with  Fred  E.  Guthery, 
which  partnership  was  still  maintained  at  the  time  of  his  appoint- 
ment as  Comptroller  of  the  Currency. 

491 


492  ROMANCE  AND  TRAGEDY  OF  BANKING 

He  assisted  in  the  organization  of  the  City  National  Bank  of 
Marion,  Ohio,  in  1880,  and  was  its  vice-president  about  ten  years. 
He  succeeded  to  the  presidency  of  the  bank  in  April,  1911,  after 
the  death  of  I.  S.  Merchant,  its  first  president. 

At  the  expiration  of  the  bank's  charter  on  September  5,  1920, 
he  assisted  in  the  organization  of  the  National  City  Bank  &  Trust 
Company,  which  company  absorbed  the  City  National  Bank.  He 
became  president  of  the  new  bank,  which  opened  with  a  capital  of 
$300,000  and  $30,000  surplus. 

He  was  a  director  of  the  Marion  Steam  Shovel  Company,  and 
for  twenty-two  years  was  the  general  counsel  of  the  company. 

He  was  a  director  and  vice-president  of  the  Marion  Union 
Stock  Yards  Company,  a  director  and  treasurer  of  the  Marion 
Packing  Company,  and  a  director  of  the  Marion  County  Tele- 
phone Company.  He  was  president  of  the  Marion  Cemetery  Asso- 
ciation, and  was  also  connected  with  many  other  enterprises 
about  Marion. 

He  was  actively  engaged  in  the  practise  of  law,  representing 
clients  doing  business  in  all  the  States  of  the  Union,  and  in  Can- 
ada, Alaska,  South  America,  Africa  and  Continental  Europe.  His 
professional  practise  has  been  largely  the  handling  of  the  busi- 
ness interests  of  his  clients. 

He  was  extensively  interested  in  farming  and  stock  feeding, 
and  owned  several  large  farms  in  Marion  County,  Ohio,  annually 
buying  and  feeding  several  hundred  heads  of  cattle  and  hogs, 
and  was  deeply  interested  in  the  successful  advancement  of  all 
agricultural  work. 

Malcontents 

While  it  was  usual  whenever  a  change  occurred  in  the  execu- 
tive head  of  the  Currency  Bureau  for  bankers  who  were  dissatis- 
fied with  the  policies  of  the  former  Comptroller  to  appeal  to  his 
successor  to  revoke  or  modify  his  rulings  or  regulations,  the  num- 
ber of  appeals  of  this  nature  made  to  the  successor  of  Mr.  Wil- 
liams was  much  more  numerous  than  those  made  under  a  change 
in  any  previous  administration. 

But  these  complaints  were  not  confined  strictly  to  the  rulings 
and  regulations  made  by  Mr.  Williams  in  the  exercise  of  the  dis- 


ROMANCE  AND  TRAGEDY  OF  BANKING  493 

cretionary  powers  that  were  vested  in  the  Comptroller  by  law. 
Many  of  them  related  to  provisions  of  the  banking  laws  enacted 
long  before  he  came  into  office,  and  which  he  was  without  author- 
ity in  the  discharge  of  his  official  duties  to  have  waived  or  modified 
if  he  had  been  disposed  to  have  done  so. 

A  good  many  bankers  did  not  take  kindly  to  restraints  of  any 
kind,  or  to  supervisory  regulations  of  their  banking  business,  but 
wanted  a  free  license  to  operate  their  banks  without  inter- 
ference from  Washington.  As  a  rule,  such  bankers  were  not 
sufficiently  familiar  with  the  banking  laws  to  have  always  been 
able  to  distinguish  between  an  office  regulation  and  a  provision 
of  law,  consequently  Comptroller  Williams  was  frequently  blamed 
for  making  arbitrary  rulings  or  regulations  when  he  had  simply 
endeavored  to  enforce  an  observance  of  a  statutory  requirement. 

The  extreme  laxity  in  this  respect,  or  negligence  which  dis- 
tinguished the  administration  of  the  Currency  Bureau  that  im- 
mediately preceded  that  of  Comptroller  Williams,  was  far  more 
censurable  for  failing  to  require  the  banks  to  observe  the  plain 
provisions  of  law  governing  their  operations,  than  any  act  of 
Mr.  Williams  in  endeavoring  to  rigidly  enforce  the  law,  and  this 
fact  made  it  more  difficult  for  him  to  secure  compliance  with  his 
requirements. 

The  comparison  of  Comptroller  Williams'  administration  of 
the  Currency  Bureau,  with  that  of  his  immediate  predecessor, 
would  be  like  comparing  two  distinctly  opposite  extremes. 

Periodical  changes  in  the  executive  head  of  the  Currency 
Bureau  seemed  also  to  have  been  regarded  as  an  opportune  time 
for  that  atom  of  humanity,  the  "anonymous  correspondent,"  to 
secretly  inject  his  insidious  and  poisonous  fangs  into  some  sub- 
ordinate officer  of  the  Bureau  who  had  incurred  his  displeasure 
in  the  discharge  of  his  official  duties  and  whose  loyalty  or  repu- 
tation he  sought  to  injure  or  destroy. 

These  mischief-making  varmints  were  usually  to  be  found 
shielding  themselves  behind  such  signatures  as  "An  Old  Line  Dem- 
ocrat," if  the  previous  administration  had  been  Republican,  or 
"A  Lifelong  Republican,"  if  the  previous  administration  had 
been  Democratic. 


494          ROMANCE  AND  TRAGEDY  OF  BANKING 

To  one  who  had  been  in  the  service  of  the  Bureau  for  a  long 
period  of  years,  and  had  witnessed  these  periodical  occurrences, 
it  was  amusing  in  many  instances  to  note  the  ingenuity  displayed 
by  these  pests,  in  the  presentation  of  their  pleas,  and  the  plausi- 
bility of  the  stories  they  told,  in  an  endeavor  to  arouse  the  sym- 
pathy of  the  new  administrative  officer,  or  to  create  in  his  mind 
a  prejudice  against  the  object  of  their  displeasure.  They  seemed 
to  think  that  the  only  record  of  the  things  of  which  they  com- 
plained, was  in  the  memory  of  the  new  Comptroller's  predecessor, 
and  they  felt  secure  in  the  thought  that  he  had  carried  that  rec- 
ord away  with  him.  They  did  not  seem  to  realize  that  in  the 
permanent  files  and  letter  books  of  the  Bureau  there  was  a  com- 
plete record  of  the  matters  complained  of,  and  an  explanation  of 
the  motives  actuating  the  complaint. 

While  no  officer  of  the  Bureau  was  immune  from  such  ma- 
licious attacks,  anonymously  made  or  otherwise,  the  Deputy 
Comptroller  seemed  to  be  the  special  object  of  devotion  of  these 
malcontents,  and  the  alleged  source  of  all  their  troubles.  Their 
fire,  therefore,  was  generally  concentrated  upon  him. 

But  the  source  of  these  attacks  was  not  confined  altogether 
to  the  anonymous  correspondent.  It  embraced  bankers  whose 
speculative  schemes  the  Deputy  had  been  largely  instrumental 
in  thwarting  and  exposing;  ex-convict  bankers  who  had  served 
terms  in  the  penitentiary  and  were  pardoned  by  a  too  lenient 
President  before  the  completion  of  their  sentences;  dismissed 
bank  examiners  separated  from  the  service  for  incompetency  and 
insubordination,  and  employees  of  the  Currency  Bureau,  male 
and  female,  who  had  been  discharged  for  cause. 

Some  members  of  Congress  also  were  not  above  giving  vent 
to  their  petty  spites  against  the  Deputy,  in  an  underhanded  way, 
on  the  floor  of  the  House  of  Representatives  or  behind  the  closed 
doors  of  the  committee  room  in  retaliation  for  his  having  incurred 
their  displeasure  by  refusing  to  furnish  confidential  information 
for  improper  use. 

A  notable  instance  of  this  fact  may  be  stated  by  way  of  illus- 
tration of  how  very  small  some  of  these  gentlemen  are  who  make 
our  laws,  and  this  statement  can  be  verified  by  reference  to  the 
Congressional  Record  covering  the  date  of  these  occurrences. 


ROMANCE  AND  TRAGEDY  OF  BANKING  495 

A  congressman  from  one  of  the  Southern  States  called  at  the 
office  of  the  Deputy  Comptroller  one  day  and  requested  a  list  of 
the  national  banks  that  had  increased  and  reduced  their  circula- 
tion during  the  six  months  immediately  preceding  his  call  and  the 
amount  and  date  of  each  increase  and  reduction. 

The  Deputy  informed  the  congressman  that  he  would  give 
him  a  statement  showing  the  aggregate  amount  of  the  increases 
and  reductions  in  circulation  during  the  period  stated  and  the 
number  of  banks  involved,  but  that  it  was  contrary  to  the  rule 
of  the  office  to  disclose  the  names  of  the  banks. 

The  congressman  replied  that  that  would  not  answer  his  pur- 
pose and  insisted  upon  having  the  names  of  the  banks. 

The  Deputy  courteously  informed  him  that  he  was  sorry,  but 
he  could  not  give  him  the  names  of  the  banks. 

He  insisted  that  as  a  member  of  Congress  he  had  a  right  to 
the  information. 

The  Deputy  replied,  "I  beg  your  pardon,  Mr.  Congressman, 
as  an  individual  member  of  Congress  you  have  no  more  right  to 
the  information  than  any  other  citizen." 

He  stated  that  he  could  obtain  it  by  securing  the  adoption 
of  a  resolution  by  the  House  calling  for  the  information. 

The  Deputy  replied  that  the  House  of  Representatives  had 
rights  in  the  matter  which  he  as  an  individual  member  of  Con- 
gress had  not,  and  if  the  House  called  for  the  information  that 
he  had  asked  for  it  would  be  furnished,  but  that  it  could  not  be 
given  to  him. 

At  that  time  there  was  some  question  under  consideration 
by  the  House  which  had  precipitated  a  debate  involving  the  prac- 
tice of  some  national  banks  of  speculating  in  Government  bonds 
by  reducing  their  circulation  and  withdrawing  their  bonds  when 
the  market  value  of  the  bonds  was  high  and  selling  them  to  get 
the  benefit  of  the  high  price,  and  subsequently  re-depositing  bonds 
and  increasing  their  circulation  when  the  market  was  low. 

This  congressman  wanted  the  information  he  had  asked  for 
to  use  in  a  speech  he  intended  to  make  in  the  House,  and  expected 
to  show  that  a  certain  large  city  bank  had  been  engaged  in  spec- 
ulation in  Government  bonds  in  the  manner  stated. 


496          ROMANCE  AND  TRAGEDY  OF  BANKING 

The  congressman  secured  the  passage  of  the  resolution  by 
the  House  calling  for  the  information  he  had  requested,  and  it 
was  promptly  furnished  the  House,  but  it  did  not  show  that  the 
particular  bank  which  the  congressman  proposed  to  attack  had 
increased  or  decreased  its  circulation  during  the  period  men- 
tioned, and  therefore  the  speech  was  not  made. 

For  a  number  of  years  the  salary  of  the  Deputy  Comptroller 
had  remained  fixed  by  statute  at  $3,000  per  annum.  Shortly 
after  the  occurrence  related,  the  salary  was  increased  in  the  ap- 
propriation bill  to  $3,500.  When  the  bill  came  before  the  House 
for  consideration  and  passage  this  congressman  took  no  part  in 
the  debate  on  the  bill  until  the  item  increasing  the  Deputy  Comp- 
troller's salary  was  reached,  although  a  number  of  similar  in- 
creases were  provided  for  in  the  bill  ahead  of  this  item,  when  he 
had  the  item  stricken  out  on  a  point  of  order.  It  was  restored 
to  the  bill  in  the  Senate  but  was  again  stricken  out  when  reported 
to  the  House  on  a  point  of  order  raised  by  this  same  congress- 
man, and  it  remained  out  when  the  bill  became  a  law. 

The  reader  may  draw  his  own  conclusion  as  to  the  motive  of 
this  statesman  in  giving  this  matter  his  special  and  persistent 
attention. 

On  another  occasion  a  prominent  congressman  from  the  West 
called  upon  the  Deputy  Comptroller,  with  two  of  his  constituents, 
for  the  purpose  of  having  him  reconsider  his  action  in  refusing 
to  approve  the  title  of  First  National  for  a  bank  which  these 
constituents  proposed  to  organize  in  their  home  town  in  the  dis- 
trict represented  by  this  congressman.  They  were  advised  of 
the  rule  of  the  Comptroller's  office  governing  the  approval  of 
the  title  of  First  National  and  the  reasons  for  its  adoption,  and 
were  informed  that  this  title  could  not  be  given  them  without 
waiving  this  rule,  which  the  Deputy  stated  he  could  not  consist- 
ently do.  The  congressman  was  most  insistent  upon  securing 
the  title  for  his  constituents,  and  contested  every  objection  made 
by  the  Deputy  to  granting  it,  but  the  Deputy  was  firm  in  his 
position  that  he  could  not  consistently  let  them  have  the  title. 

The  Congressman  then  declared  his  intention  to  appeal  from 
the  decision  of  the  Deputy  to  the  Comptroller  when  the  latter 


ROMANCE  AND  TRAGEDY  OF  BANKING  497 

returned  to  Washington,  he  being  temporarily  out  of  the  City, 
and  requested  his  constituents  to  remain  over  for  a  day  or  two. 
When  the  Comptroller  returned  they  called  upon  him  and  laid 
their  appeal  before  him.  The  Deputy  was  not  present  at  the 
interview,  but  when  it  was  over  the  congressman  came  into  his 
room,  which  adjoined  that  of  the  Comptroller,  and  told  him  that 
the  Comptroller  had  promised  to  review  the  case  during  the  day 
and  had  requested  him  to  call  later,  when  he  would  let  him  know 
his  decision.  He  then  said  to  the  Deputy,  "Now  I  have  been  in 
Congress  and  around  Washington  long  enough  to  know  that  a 
man  who  has  been  in  the  service  of  the  Bureau  as  long  as  you 
have,  and  who  occupies  the  position  that  you  occupy,  has  a  great 
deal  to  say  in  the  determination  of  these  questions,  and,"  he  said, 
"you  can  get  me  this  title  if  you  will."  He  said  further,  "I  can- 
not tell  you  how  much  it  means  to  me  to  secure  this  title  for  these 
gentlemen,"  and  "If  you  will  help  me  to  get  it  for  them  I  shall 
appreciate  it  very  much  and  /  will  not  forget  you" 

The  Deputy  stated  in  reply  that  if  the  Comptroller  in  the 
exercise  of  his  discretion  was  disposed  to  let  the  congressman's 
constituents  have  the  title  of  First  National  that  he  would  inter- 
pose no  objection,  but  if  he  asked  him  for  his  opinion  or  recom- 
mendation in  the  matter  he  would  be  obliged  to  advise  against  it. 

Returning  later  in  the  day  the  congressman  and  his  constit- 
uents called  upon  the  Comptroller,  and  when  the  interview  was 
ended  they  came  through  the  Deputy's  room  in  passing  out  and 
the  Deputy  inquired  whether  the  Comptroller  had  decided  their 
matter.  One  of  them  replied,  "Yes,  but  not  to  our  satisfaction." 

The  congressman,  standing  in  the  doorway  between  the  Dep- 
uty's room  and  the  corridor,  with  his  arm  outstretched  at  full 
length  and  his  finger  pointing  at  the  Deputy,  said,  "And  I  blame 
you  for  it,"  and  he  and  his  constituents  then  departed  very  much 
disappointed.  The  Comptroller  had  sustained  the  action  of  the 
Deputy  in  denying  the  title  of  First  National. 

Now  for  the  sequence.  At  the  time  of  this  occurrence  the 
estimates  for  appropriations  for  the  Currency  Bureau  for  the 
following  fiscal  year  had  been  submitted  to  the  Appropriations 
Committee,  of  which  this  congressman  was  a  prominent  member. 


498  ROMANCE  AND  TRAGEDY  OF  BANKING 

These  estimates  contained  a  recommendation  from  the  Secretary 
of  the  Treasury  and  the  Comptroller  of  the  Currency  for  an 
increase  in  the  salary  of  the  Deputy  Comptroller  of  $500  per 
annum.  The  Deputy  Comptroller  realized  that  in  denying  to  this 
congressman  the  request  he  had  so  persistently  made  of  him  that 
he  had  jeopardized  his  chances  for  securing  the  increase  of  salary 
that  had  been  recommended,  but  nevertheless  he  conscientiously 
discharged  his  duty  without  regard  to  its  effect  upon  himself. 

The  increase  in  salary  was  not  allowed  that  year,  nor  for  the 
two  or  three  following  years,  although  it  had  been  recommended 
each  succeeding  year,  and  it  was  not  until  after  the  congressman 
left  the  Appropriations  Committee  that  the  increase  was  granted. 

Now,  my  dear  reader,  if  you  were  placed  in  a  similar  official 
and  responsible  position  and  a  congressman  were  to  call  upon 
you  and  ask  you  to  do  something  for  him  which  you  could  not 
consistently  do,  and  say  to  you,  "If  you  will  do  this  for  me  I  will 
not  forget  you,"  and  at  that  very  time  there  was  a  recommenda- 
tion pending  before  a  committee  of  which  the  congressman  was 
a  member  for  an  increase  in  your  salary,  what  inference  would 
you  draw  from  his  remark,  "If  you  will  do  this  for  me  I  will  not 
forget  you,"  and  the  fact  that  the  increase  in  salary  recom- 
mended was  not  granted  until  three  or  four  years  later,  when 
that  congressman  was  no  longer  a  member  of  the  Appropriations 
Committee  ? 

I  leave  that  to  you  for  determination.     But — 

There  are  more  things   in   heaven   and   earth,   Horatio, 
Than  are  dreamt  of  in  your  philosophy. 

The  foregoing  incidents  are  only  two  of  many  similar  occur- 
rences that  could  be  related  as  showing  the  temptations  thrown 
in  the  way  of  an  official  of  the  executive  departments  in  Wash- 
ington in  the  discharge  of  his  duties  and  the  injustice  that  is 
frequently  done  him  by  our  lawmakers  on  Capitol  Hill. 

Title  of  First  National  Bank 

The  name  First  National  Bank  is  the  only  bank  title  that 
ever  had  a  commercial  value,  consequently  this  title  was  very 


ROMANCE  AND  TRAGEDY  OF  BANKING  499 

much  in  demand  by  the  organizers  of  new  banks  and  by  the  officers 
of  existing  banks  desiring  to  change  the  names  of  their  associa- 
tions. Originally  it  was  the  purpose  of  the  Comptroller  to  restrict 
all  national  bank  titles  to  serial  numbers  so  as  to  indicate  the 
order  in  which  two  or  more  banks  in  the  same  city  or  town  were 
organized,  but  this  plan  was  so  strongly  opposed  by  the  organ- 
izers of  banks  in  large  cities  and  by  State  banks  contemplating 
conversion  into  national  associations,  that  the  plan  was  aban- 
doned when  the  serial  numbers  began  to  run  high.  In  New  York 
City  the  serial  numbers  ran  as  high  as  the  Tenth  National  Bank 
and  the  State  banks  preferred  retaining  their  old  names  rather 
than  convert  into  a  national  bank  and  take  a  high  serial  number. 

The  title  First  National,  if  it  means  anything,  indicates  that 
the  bank  of  that  name  was  the  first  bank  to  be  established  in  the 
place  of  its  location.  Acting  on  this  assumption,  therefore,  other 
banks  having  items  for  collection  and  no  regular  correspondent 
at  that  place,  sent  their  business  to  the  First  National  Bank. 

Previous  to  the  passage  of  the  Federal  Reserve  Act  the  title 
of  First  National  was  much  more  valuable  than  it  has  been  since 
the  Federal  Reserve  Banks  established  the  practice  of  collecting 
at  par  all  checks  and  drafts  for  member  banks  in  their  respective 
districts  and  crediting  them  with  the  proceeds  on  their  books. 
But  even  without  these  collection  items  there  is  a  great  deal  of 
business  that  goes  to  banks  with  the  title  of  First  National  which 
they  probably  would  not  receive  otherwise,  so  that  the  title  still 
retains  considerable  commercial  value. 

There  have  been  many  bitter  contests  between  rival  appli- 
cants for  this  title  and  many  keen  disappointments  over  its 
refusal. 

As  far  back  as  1886,  when  William  L.  Trenholm  was  Comp- 
troller of  the  Currency,  there  was  quite  a  spirited  contest  for 
this  title  between  two  applicants  in  which  a  United  States  Sen- 
ator took  an  active  interest.  In  pleading  for  the  title  he  indis- 
creetly made  the  statement  to  the  Comptroller  that  the  title  was 
worth  $50,000  to  his  constituents.  Being  uncertain  of  the  motive 
which  prompted  the  Senator  to  make  that  statement,  Colonel 
Trenholm,  with  a  flushed  face,  replied  in  a  very  emphatic  man- 
ner, "Well,  senator,  if  the  title  'First  National'  has  such  a  com- 


500  ROMANCE  AND  TRAGEDY  OF  BANKING 

mercial  value  as  you  say  it  has,  I  will  establish  a  code  of  rules  for 
the  government  of  this  office  in  approving  that  title  which  will 
determine  the  matter  beyond  question,"  and  thereupon  he  issued 
the  following  order: 

The  title  of  "First  National  Bank"  will  not  be  ap- 
proved unless : 

1st.  The  application  therefor  is  really  the  first  ap- 
plication to  establish  a  national  bank  in  the  place  named 
in  the  title,  or  unless  all  such  applications  previously  made 
have  lapsed  or  been  abandoned. 

2nd.  Unless  no  national  bank  is  located  at  the  time  in 
the  place  named  in  the  title. 

3rd.  Unless  the  title  asked  for,  though  once  in  use, 
is  at  the  time  vacant  by  reason  of  the  entire  extinction  of 
the  bank  that  had  it. 

4th.  Unless  every  national  bank  at  the  time  located  in 
the  place  .named  in  the  title  assents  to  the  application.  The 
term  "place"  means  any  ward  of  a  city,  county,  State  or 
geographical  area. 

When  Mr.  Lacey  became  Comptroller  in  1889,  he  modified 
this  rule  so  as  to  permit  any  existing  bank  in  the  place  to  have 
the  title  "First  National,"  provided  it  procured  the  written  ap- 
proval of  all  other  national  banks  in  the  same  place. 

In  July,  1919,  Mr.  Williams,  then  Comptroller,  laid  down 
the  rule  that  an  application  for  the  title  "First  National"  would 
receive  favorable  consideration  under  the  following  conditions : 

1st.  When  no  national  bank  existed  at  the  locality  at 
the  time  of  receipt  of  the  application. 

2nd.  When  the  bank  applying  was  the  only  existing 
national  bank  in  the  place. 

3rd.  When  the  bank  applying  was  the  oldest  existing 
national  bank  in  the  locality  and  none  of  the  other  national 
banks  was  a  successor  of  the  original  first  national  bank. 

Comptroller  Williams  later  modified  this  rule  by  authorizing 
the  conversion  of  the  Illinois  State  Trust  Company  in  East  St, 
Louis,  111.,  into  a  national  bank  under  the  title  "First  National," 


KOMANCE  AND  TRAGEDY  OF  BANKING  501 

on  the  ground  that  its  shareholders  had  been  interested  in  the  old 
First  National  Bank  of  that  city,  which  went  into  voluntary 
liquidation  March  3,  1907,  and  was  absorbed  by  the  Illinois  State 
Trust  Company,  but  at  the  time  the  conversion  was  authorized, 
there  were  two  other  national  banks  existing  in  East  St.  Louis. 

Further  modifications  of  the  rule  governing  the  approval  of 
this  title  have  been  made  by  succeeding  Comptrollers,  until  now 
precedent  may  be  found  for  almost  any  position  that  the  Comp- 
troller may  think  proper  to  adopt. 

Theodore  Roosevelt's  Methods 

When  Theodore  Roosevelt  was  President  of  the  United  States 
there  was  a  national  bank  failure  in  one  of  the  large  cities  of  the 
West.  The  Deputy  Comptroller  was  Acting  Comptroller  at  the 
time,  as  he  always  appeared  to  be  when  any  disturbance  occurred, 
and  one  of  the  United  States  Senators  representing  the  State  in 
which  the  failed  bank  was  located  called  to  see  him  in  regard  to 
the  appointment  of  a  receiver.  The  Senator  was  advised  of  the 
rule  of  the  office  governing  the  selection  of  receivers  and  he  was 
told  that  the  privilege  of  naming  a  receiver  for  this  bank  would 
be  given  him  if  he  would  recommend  a  man  possessing  the  neces- 
sary qualifications. 

The  following  day  the  Washington  correspondent  of  a  news- 
paper published  in  the  city  where  the  failed  bank  was  located 
called  upon  the  Deputy  Comptroller  at  the  request  of  the  owner 
of  the  newspaper  and  recommended  the  appointment  of  a  friend 
of  his  as  receiver.  After  inquiring  as  to  the  business  experience 
of  the  party  recommended,  the  Deputy  Comptroller  informed  the 
correspondent  that  he  could  not  appoint  his  employer's  friend, 
as  he  did  not  appear  to  have  had  the  experience  necessary  to 
qualify  him  for  receivership  work. 

It  developed  later  that  the  newspaper  owner  was  a  long-time 
personal  friend  of  President  Roosevelt,  and  without  mentioning 
that  fact  to  the  Deputy  Comptroller  the  correspondent  went 
immediately  to  Oyster  Bay,  N.  Y.,  to  see  the  President,  who  at 
that  time  was  at  that  place,  and  laid  the  matter  before  him.  The 
President  wrote  a  note  to  the  Deputy  Comptroller  in  the  pres- 


502          ROMANCE  AND  TRAGEDY  OF  BANKING 

ence  of  the  correspondent  and  mailed  it  to  Washington,  in  which 
he  stated  that  the  newspaper  owner  was  a  long-time  personal 
friend  of  his,  that  he  regarded  him  very  highly  and  had  the 
utmost  confidence  in  any  recommendation  he  might  make,  and 
that  it  would  be  very  gratifying  to  him  if  the  Deputy  could 
appoint  him  receiver  of  the  bank. 

The  newspaper  correspondent  called  the  day  following  and 
without  intimating  that  he  had  been  to  Oyster  Bay  to  see  the 
President  inquired  of  the  Deputy  Comptroller  whether  he  had 
selected  a  receiver  for  the  bank.  He  was  advised  that  he  had  not. 
He  then  inquired  whether  he  had  not  received  a  letter  from  Presi- 
dent Roosevelt  instructing  him  to  appoint  the  man  he  had  recom- 
mended two  or  three  days  before.  He  was  informed  that  he  had 
not.  The  correspondent  seemed  very  much  nonplused,  as  he  had 
seen  the  President  write  a  letter  the  day  before,  but  had  not  read 
it,  and  therefore  did  not  know  that  the  President  had  not  in- 
structed the  appointment  of  his  friend,  but  had  only  stated  that 
it  would  be  gratifying  to  him  if  he  could  be  appointed,  which 
expression  under  ordinary  circumstances  would  have  been  equiva- 
lent to  a  command,  but  the  circumstances  of  the  case  were  not 
usual,  and  therefore  the  Deputy  Comptroller  was  not  disposed  to 
act  on  the  President's  suggestion  until  after  he  had  acquainted 
him  with  the  facts. 

The  newspaper  correspondent  then  inquired  of  the  Deputy 
Comptroller  what  steps  he  had  taken  toward  the  selection  of  a 
receiver,  and  was  informed  that  several  days  previously  he  had 
had  a  conference  with  one  of  the  senators  from  that  State  and 
had  requested  him  to  recommend  a  man  possessing  the  qualifica- 
tions necessary  to  the  proper  filling  of  the  position.  The  news- 
paper correspondent  then  left,  apparently  very  much  puzzled 
over  the  situation. 

The  Deputy  Comptroller  then  wrote  a  letter  to  President 
Roosevelt,  acknowledging  the  receipt  of  his  letter  and  stating 
that  before  its  receipt  he  had  had  a  conference  with  the  United 
States  senator  in  regard  to  the  appointment  of  a  receiver  and 
had  told  him  the  office  rule  governing  such  appointments  and  had 
promised  him  that  if  he  could  find  a  man  who  would  meet  these 
requirements  he  would  appoint  him.  The  Deputy  then  explained 


ROMANCE  AND  TRAGEDY  OF  BANKING  503 

to  the  President  that  the  sole  purpose  of  the  Comptroller's  office 
in  the  selection  of  receivers  for  failed  banks  was  to  select  men 
who  by  their  experience  could  realize  the  most  money  from  the 
assets  of  the  bank  for  the  depositors  and  other  creditors,  and 
that  it  was  not  believed  that  the  man  whom  he  had  suggested  for 
the  place  had  had  the  experience  necessary  to  enable  him  to 
accomplish  what  the  Comptroller's  office  desired. 

The  Deputy  concluded  his  letter  by  saying  to  the  President, 
"Now,  Mr.  President,  with  all  the  facts  before  you,  I  will  await 
a  further  expression  of  your  pleasure  before  taking  definite 
action." 

The  next  day's  mail  brought  a  letter  from  the  President  say- 
ing that  in  view  of  the  statements  made  by  the  Deputy  Comp- 
troller and  the  action  he  had  already  taken  towards  securing  a 
competent  receiver  for  the  bank,  he  had  no  further  suggestion  to 
offer. 

The  man  finally  selected  and  recommended  by  the  senator  was 
therefore  appointed  receiver,  and  his  administration  of  the  affairs 
of  the  trust  proved  to  be  very  satisfactory,  but  the  newspaper 
correspondent  never  understood  why  the  President's  instructions 
to  appoint  his  man  had  not  been  carried  out. 

There  was  another  bank  failure  during  President  Roosevelt's 
administration,  in  one  of  our  large  cities.  This  institution  had 
the  reputation  of  being  a  political  bank,  and  like  all  banks  of 
that  character,  proved  to  be  no  exception  to  the  rule,  in  regard 
to  criminality  and  rascality  of  management. 

This  bank  was  known  to  have  been  in  a  precarious  condition 
for  several  months  before  it  was  closed,  and  when  the  examiner 
advised  the  Deputy  Comptroller,  who  at  that  time  was  again  in 
charge  of  the  office,  that  the  bank  was  hopelessly  insolvent,  he 
immediately  directed  him  to  close  its  doors,  and  at  the  same  time 
instructed  one  of  the  officials  of  the  office,  who  was  an  expert  in 
receivership  work,  to  go  immediately  to  the  bank  and  take  pos- 
session of  it  as  receiver,  and,  when  he  had  done  so,  to  advise  the 
Deputy  Comptroller  by  wire,  and  he  would  make  public  announce- 
ment of  his  appointment  in  order  to  forestall  any  attempt  on  the 
part  of  the  political  friends  of  the  management  of  the  failed  con- 


504          ROMANCE  AND  TRAGEDY  OF  BANKING 

cern  to  secure  the  appointment  of  a  receiver  of  their  selection, 
as  it  was  anticipated  they  would  make  a  strenuous  effort  to  do. 
A  few  hours  after  the  bank  was  closed  and  announcement  had 
been  made  of  the  appointment  of  a  receiver,  the  Deputy  Comp- 
troller received  a  telegram  from  a  United  States  senator  from 
that  section  of  the  country  recommending  a  local  man  for  ap- 
pointment as  receiver.  This  man  was  known  to  have  been  a  bosom 
friend  of  the  bank  officer  who  was  principally  responsible  for  the 
wrecking  of  the  bank,  and  was  one  of  his  political  associates. 

The  senator  was  advised  by  wire  that  a  receiver  had  been 
appointed  before  the  receipt  of  his  recommendation. 

The  following  day  this  senator  and  a  representative  in  Con- 
gress, from  the  city  of  the  bank's  location,  called  upon  the  Dep- 
uty Comptroller  and  renewed  the  recommendation  for  appoint- 
ment as  receiver  of  the  man  the  senator  had  recommended  by 
wire  the  day  before.  They  urged  in  the  strongest  terms  the 
superior  qualifications  and  business  experience  of  their  candidate, 
and  his  especial  fitness  for  the  position  of  receiver  because  of  his 
knowledge  of  local  conditions  and  his  acquaintance  with  the 
people  with  whom  the  receiver  would  have  to  deal. 

The  Deputy  Comptroller  stated  to  the  senator  and  the  rep- 
resentative in  reply,  that  conceding  all  they  said  of  their  candi- 
date's fitness  for  the  position,  a  better  or  more  experienced  man 
than  the  one  he  had  appointed  receiver  he  did  not  believe  could 
be  found,  and  that  he  intended  the  appointment  to  be  permanent, 
and  was  not  disposed  to  make  any  change. 

"Very  well,  then,"  said  the  senator,  "we  will  go  higher." 

"Very  well,  gentlemen,"  said  the  Deputy,  "that  is  your  privi- 
lege." 

The  distinguished  senator  had  not  been  accustomed  to  having 
his  recommendations  disregarded  by  one  so  far  down,  in  his  esti- 
mation, in  the  official  scale  of  importance  as  a  Deputy  Comp- 
troller of  the  Currency,  so  he  declared  it  to  be  his  purpose  to 
appeal  to  the  Secretary  of  the  Treasury. 

Later,  on  the  same  day,  the  Secretary  of  the  Treasury  sent 
for  the  Deputy  Comptroller  in  regard  to  the  matter,  and  the  Dep- 
uty explained  the  situation  in  detail  to  him,  and  the  qualifications 


ROMANCE  AND  TRAGEDY  OF  BANKING  505 

and  special  fitness  for  this  particular  trust,  of  the  man  whom  he 
had  appointed  receiver. 

The  Secretary  replied,  saying,  "Well,  you  know  that  Senator 
(calling  him  by  name)  is  a  pretty  big  man.  He  has  done  a  great 
deal  for  the  administration  and  we  have  to  rely  upon  him  to  do 
a  good  deal  more,  so  that  it  may  be  necessary  to  meet  his  wishes 
in  this  matter." 

The  Deputy  Comptroller  was  not  pleased  with  the  apparent 
attitude  of  the  Secretary  as  indicated  by  his  remarks,  as  it  gave 
him  the  impression  that  he  did  not  intend  to  support  him  in  this 
appointment  as  against  the  senator ;  but  later  he  was  very  much 
gratified  to  learn  that  his  impression  was  wrong. 

When  the  Deputy  returned  to  his  room  he  wired  the  receiver 
to  advise  him  promptly  by  mail  whether  there  were  any  good 
reasons  why  the  party  recommended  by  the  senator  should  not  be 
appointed  receiver  of  the  bank. 

The  next  morning's  mail  brought  a  letter  from  the  receiver 
in  which  he  stated  that  it  would  be  a  great  mistake  to  appoint 
this  man  receiver,  and  that  his  appointment  would  subject  the 
Comptroller  to  severe  public  criticism,  as  he  was  generally  known 
to  have  been  an  intimate  social  and  political  friend  of  the  man 
who  was  responsible  for  wrecking  the  bank,  who  was  one  of  his 
bondsmen  as  a  city  official,  and  was  himself  a  debtor  of  the  bank 
for  a  considerable  sum. 

The  letter  also  contained  copies  of  several  very  strong  pro- 
tests against  his  appointment,  or  the  appointment  of  any  other 
resident  of  the  city  in  which  the  bank  was  located.  Upon  receipt 
of  this  communication  and  its  inclosures,  the  Deputy  Comptroller 
immediately  wrote  a  letter  to  the  Secretary  of  the  Treasury  in 
part  as  follows: 

I  enclose  herewith  copies  of  several  communications  re- 
ceived this  morning  protesting  against  the  appointment  of 
Mr.  —  —  or  any  other  resident  of  -  —  as  Re- 

ceiver of  the  -  -  National  Bank. 

Mr.  -  — ,  whom  I  appointed  Receiver  of  the  bank, 

is  thoroughly  competent  in  every  respect.  He  has  been 
connected  with  this  Bureau  in  receivership  work  for  ten 
or  twelve  years.  I  selected  him  because  of  his  special 


506          ROMANCE  AND  TRAGEDY  OF  BANKING 

qualifications  for  the  position  and  his  long  experience  in  this 
particular  line  of  service,  his  knowledge  of  the  banking 
laws,  decisions  of  the  courts  in  insolvent  bank  cases,  and 
his  familiarity  with  the  methods  of  this  Bureau  in  the 
administration  of  insolvent  banks,  insuring  a  speedy, 
judicious,  economical  and  impartial  liquidation  of  the  affairs 
of  this  trust. 

Politics  played  a  large  part  in  the  wrecking  of  this  in- 
stitution. There  is  no  politics  in  Mr.  -  — 's  appoint- 
ment. There  should  be  none  in  any  appointment  of  this 
kind. 

To  appoint  Mr.  —      as  receiver  of  this  bank  would 

be  against  the  established  policy  of  this  Bureau  and  con- 
trary to  all  precedent  within  my  recollection,  and  would 
undoubtedly  subject  the  Comptroller  to  severe  criticism. 

The  law,  as  you  are  well  aware,  Mr.  Secretary,  vests 
in  the  Comptroller  of  the  Currency  the  power  to  appoint 
receivers  of  failed  banks,  and  holds  him  accountable  for 
the  proper  administration  of  the  trusts.  The  responsibility 
for  the  appointment  should  carry  with  it  the  untrammelled 
right  of  selection.  If  the  President  directs,  or  if  you, 
Mr.  Secretary,  direct  the  appointment  of  Mr.  — 
as  receiver  of  this  bank,  I  shall  make  the  appointment, 
but  with  very  great  reluctance  and  against  my  judgment 
as  to  what  is  for  the  best  interests  of  all  concerned  and 
the  service  in  general. 

The  receiver  of  this  bank  should  be  an  entirely  inde- 
pendent and  disinterested  party  who  can  be  depended  upon 
to  impartially  administer  the  affairs  of  the  trust  and  to 
aid  to  the  fullest  extent  in  bringing  to  justice  all  who 
were  concerned  in  the  wrecking  of  this  institution. 

On  the  same  day  that  the  Deputy  Comptroller  addressed  this 
communication  to  the  Secretary  he  received  a  letter  from  him  in 
reply  in  part  as  follows: 

Your  policy  in  appointing  receivers  for  failed  banks  is 
precisely  in  line  with  my  instructions  given  on  a  number  of 
occasions  since  I  have  been  Secretary  of  the  Treasury,  and 
particularly  during  the  last  few  weeks  when  several  ques- 
tions relating  to  the  appointment  of  receivers  have  been 
brought  to  my  attention. 


ROMANCE  AND  TRAGEDY  OF  BANKING  507 

So  that  there  may  be  no  misunderstanding  whatever  as 
to  my  attitude  in  this  regard,  I  want  to  repeat  that  politics 
should  play  no  part  whatever  in  the  administration  of  the 
office  of  the  Comptroller  of  the  Currency. 

Appointment  of  bank  examiners,  receivers,  and  others 
under  that  office  should  be  made  on  merit,  in  the  effort  to 
secure  efficient  and  impartial  execution  of  the  law. 

Your  action  in  regard  to  the  appointment  of  a  receiver 
is  approved. 

Not  satisfied  with  the  action  of  the  Secretary  of  the  Treasury 
in  sustaining  the  Deputy  Comptroller  in  declining  to  appoint  his 
man  as  receiver,  the  senator  appealed  to  President  Roosevelt  and 
the  President,  after  informing  himself  as  to  the  facts  in  the  case, 
wrote  the  senator  as  follows: 

I  think  this  is  peculiarly  a  case  where  the  Government 
should  clear  up  the  whole  situation  in  its  own  way,  with 
its  own  officers,  and  without  any  regard  whatever  to  any- 
thing connected  with  politics. 

The  failure  of  the  two  banks  named  and  the  incidents  related 
in  the  preceding  pages  following  the  biography  of  Mr.  Crissinger 
have  no  connection  with  his  administration  of  the  Comptroller's 
office,  but  they  were  introduced  in  the  belief  that  they  might  be 
of  interest  to  the  reader  as  showing  some  of  the  annoyances  and 
difficulties  encountered  by  an  administrative  official  in  an  honest 
endeavor  to  discharge  his  duties  in  the  best  interests  of  the  public 
and  the  service  which  he  represents,  and  also  to  enable  him  to 
contrast  the  attitude  of  President  Roosevelt  with  that  of  the  two 
representatives  in  Congress  and  the  United  States  senator  here- 
inbefore mentioned  when  he  was  advised  by  the  same  subordinate 
official  that  the  man  he  expressed  a  desire  to  have  appointed 
receiver  was  not  qualified  under  departmental  regulations  for  the 
position  and  that  it  was  not  considered  for  the  best  interests  of 
the  service  that  he  should  be  appointed. 

President  Roosevelt  simply  suggested  the  appointment  of  the 
man  of  his  choice  when  he  had  the  power  to  have  directed  the 
appointment  to  be  made,  but  when  he  was  advised  of  the  reasons 


508          ROMANCE  AND  TRAGEDY  OF  BANKING 

why  the  appointment  was  considered  inadvisable  he  readily 
accepted  the  views  of  his  subordinate  and  acquiesced  in  his  deci- 
sion because  he  believed  the  Deputy  Comptroller  was  actuated  by 
what  he  considered  to  be  for  the  best  good  of  the  service,  and 
President  Roosevelt  invariably  sustained  the  official  whom  he 
believed  to  be  governed  by  such  considerations. 

The  occurrences  related  were  by  no  means  rare  or  isolated 
cases.  Many  incidents  of  a  similar  nature  could  be  recited  in  the 
career  of  President  Roosevelt  as  showing  that  in  all  matters  of 
this  kind  he  placed  the  good  of  the  service  above  every  other 
consideration. 


First  Official  Act  of  Comptroller  Crissinger 

The  first  official  act  of  importance  of  Mr.  Crissinger  after 
assuming  charge  of  the  office  was  the  revision  and  simplification 
of  the  forms  on  which  national  banks  make  and  publish  the 
reports  of  condition  required  by  law  in  response  to  the  calls  of 
the  Comptroller,  not  less  than  five  times  each  year. 

When  Comptroller  Williams  assumed  charge  of  the  office  on 
February  2,  1914,  the  form  of  report  used  on  the  last  call  immedi- 
ately preceding  that  date  contained  forty-three  items  of  resources 
and  liabilities  on  the  face  of  the  report  and  eleven  schedules  on 
the  reverse  side.  At  that  time  and  for  many  years  previously  it 
had  been  the  practice  of  the  office  to  make  very  few  changes  in 
the  form  of  the  report,  as  it  was  held  that  frequent  changes  in  the 
form  were  calculated  to  destroy  its  usefulness  for  comparative 
purposes,  therefore  uniformity  was  considered  very  desirable  and 
necessary. 

The  forms  used  by  Mr.  Williams  for  the  first  and  nine  suc- 
ceeding calls  after  he  became  Comptroller  contained  no  material 
changes  or  increase  in  the  number  of  items,  but  the  tenth  call 
made  by  him  contained  an  aggregate  of  fifty-one  items  on  the  face 
of  the  report,  an  increase  of  eleven,  and  thirty  schedules  on  the 
reverse  side,  an  increase  of  nineteen. 

Each  succeeding  report  called  for  by  Mr.  Williams  was  ma- 
terially changed  by  the  elimination  of  old  items  and  the  substi- 
tution of  new  ones,  and  the  number  was  increased  until  the  last 


ROMANCE  AND  TRAGEDY  OF  BANKING  509 

call  made  by  him  immediately  before  his  retirement  from  office 
contained  one  hundred  and  five  items  on  the  face  of  the  report, 
including  those  below  the  total  figures  and  twenty-nine  schedules 
on  the  reverse  side,  each  containing  from  three  to  thirteen  items. 

The  constant  changing  of  the  form  of  the  report  and  the  addi- 
tion of  new  items  with  each  change  was  the  cause  of  a  great  deal 
of  dissatisfaction  and  complaint  on  the  part  of  the  banks,  as 
their  books  did  not  contain  the  information  called  for  in  a  way 
to  enable  them  to  readily  make  up  the  report,  therefore  they 
claimed  that  its  preparation  became  more  and  more  difficult  with 
each  call,  and  consequently  more  burdensome,  annoying  and 
expensive,  so  that  when  Mr.  Crissinger  assumed  charge  of  the 
office  he  had  received  so  many  requests  from  the  banks  for  a  sim- 
plification of  the  form,  that  the  first  official  act  to  which  he 
directed  his  attention  was  a  revision  of  the  form  by  the  elimina- 
tion of  all  items  which  he  regarded  as  non-essential  and  declaring 
it  to  be  his  purpose  to  return  to  the  practice  of  the  office  before 
Mr.  Williams  became  Comptroller,  of  maintaining  a  uniform 
report  blank  for  each  succeeding  call.  He  thereupon  reduced  the 
number  of  items  on  the  face  of  the  form  used  in  his  first  call  for 
a  report  from  one  hundred  and  five  items  on  the  face  of  the  report, 
including  those  below  the  total  figures,  and  twenty-nine  schedules 
on  the  reverse  side,  to  fifty-eight  items  on  the  face  of  the  report 
including  those  below  the  total  figures,  and  seventeen  schedules 
on  the  reverse  side,  and  rescinded  also  the  regulation  made  by 
Mr.  Williams  that  the  copy  of  the  report  retained  by  the  bank 
for  its  files  and  the  copy  furnished  the  newspaper  for  publication 
should  be  a  duplicate  original,  signed,  attested  and  sworn  to  the 
same  as  that  furnished  the  Comptroller's  office,  instead  of  a  copy 
as  formerly  required. 

This  action  of  Mr.  Crissinger  was  received  with  general  satis- 
faction by  the  banks,  and  for  which  he  was  warmly  commended. 

With  no  intention  to  detract  in  the  least  from  the  credit  and 
commendation  so  generally  given  Mr.  Crissinger  for  his  prompt 
modification  of  the  form  for  reports  of  condition,  at  the  same 
time,  inasmuch  as  the  Deputy  Comptroller  was  regarded  by  many 
bankers  as  being  largely  responsible  for  these  objectionable 
forms,  it  is  deemed  proper  to  state  that  when  Mr.  Williams  retired 


510          ROMANCE  AND  TRAGEDY  OF  BANKING 

from  office  it  was  assumed  from  past  experiences  by  the  Deputy 
Comptroller,  who  became  Acting  Comptroller  immediately  when 
the  vacancy  occurred,  that  some  weeks  would  probably  elapse 
before  a  successor  to  Mr.  Williams  would  be  nominated  by  the 
President  and  confirmed  by  the  Senate,  and  that  the  duty  of 
making  the  next  call  on  the  banks  would,  therefore,  devolve  upon 
him  as  Acting  Comptroller.  He  therefore  immediately  instructed 
the  Chief  of  the  Statistical  Division  of  the  Comptroller's  office  to 
carefully  revise  the  report  of  condition  form  and  to  eliminate 
therefrom  all  items  which  were  regarded  as  unnecessary  and  non- 
essential,  and  when  Mr.  Crissinger  assumed  charge  of  the  office 
fifteen  days  later  he  approved  and  accepted  this  revised  form  with 
practically  no  change  and  used  it  in  his  first  call  upon  the  banks 
for  a  report. 

Suit  to  Forfeit  the  Charter  of  the  First  National  Bank, 
Hagerstown,  Md. 

On  September  28,  1921,  a  suit  was  entered  in  the  United 
States  District  Court  for  the  District  of  Maryland  at  Baltimore, 
by  the  United  States  Attorney,  in  the  name  of  the  Comptroller 
of  the  Currency,  to  annul  the  charter  of  the  First  National  Bank 
of  Hagerstown,  Md.,  for  violations  of  the  national  banking  laws. 

The  court  being  of  the  opinion  that  the  mere  filing  of  a  com- 
plaint of  such  a  character  would  precipitate  a  run  on  the  bank 
and  cause  irreparable  injury  and  damage  to  the  institution  and 
many  of  its  creditors,  appointed  National  Bank  Examiner  Robert 
D.  Garrett  temporary  receiver,  until  a  hearing  could  be  had  on 
the  bill  of  complaint  and  an  answer  thereto  filed  by  the  defendant. 

Upon  filing  a  bond  with  the  Clerk  of  the  Court  in  the  penal 
sum  of  fifty  thousand  dollars  the  receiver  was  directed  to  take 
immediate  charge  of  the  bank  and  all  of  its  assets  of  every  char- 
acter and  description  and  to  hold  the  same  subject  to  the  further 
orders  of  the  Court,  to  suspend  all  payments,  and  to  collect  all 
maturing  notes  and  obligations  of  every  character  owned  by  the 
bank.  The  receiver  was  also  authorized  by  the  Court  to  do  and 
perform  any  and  all  things  that  were  necessary  or  proper  for 
him  to  do  as  receiver. 


ROMANCE  AND  TRAGEDY  OF  BANKING  511 

The  authority  of  the  court  to  appoint  a  receiver  to  take 
charge  of  a  national  bank  pending  the  hearing  of  a  complaint  of 
the  Comptroller  of  the  Currency  in  a  suit  to  forfeit  the  charter 
of  the  association  for  violations  of  law  was  seriously  questioned. 
There  was  no  precedent  for  such  action.  The  law  specifically 
stated  the  conditions  under  which  a  receiver  might  be  appointed 
for  a  national  bank,  but  was  silent  as  to  the  method  of  procedure 
in  the  case  of  forfeiture  proceedings. 

In  discussing  with  representatives  of  the  Department  of  Jus- 
tice, previous  to  the  institution  of  the  suit,  the  method  to  be  fol- 
lowed in  the  Hagerstown  case,  the  Deputy  Comptroller  advised 
them  that  he  would  arrange  to  have  a  national  bank  examiner  in 
readiness  to  take  charge  of  the  bank  in  the  name  of  the  Comp- 
troller of  the  Currency  in  the  event  that  a  run  on  the  institution 
should  develop  when  it  became  known  that  a  suit  had  been  filed 
to  forfeit  the  charter  of  the  bank.  The  Comptroller  being  fully 
satisfied  that  the  bank  was  not  in  a  condition  to  meet  all  demands 
that  would  be  made  upon  it  by  depositors  and  other  creditors, 
would  have  been  well  within  his  authority  to  appoint  a  receiver 
under  such  circumstances  and  take  possession  of  the  institution 
to  prevent  preference  of  creditors. 

It  always  has  been  contended  by  the  Comptroller's  office  that 
when  a  court  of  competent  jurisdiction  declared  the  charter  of  a 
national  bank  forfeited,  the  Comptroller  of  the  Currency,  under 
authority  of  such  decree,  could  appoint  a  receiver  for  the  bank 
to  liquidate  its  affairs.  On  the  other  hand,  it  has  been  contended 
that  the  directors  of  the  bank  would  have  authority  to  liquidate 
the  bank  the  same  as  if  the  association  had  been  voted  into  volun- 
tary liquidation  by  its  stockholders,  but  no  precedent  or  author- 
ity was  known  for  the  Court  to  appoint  a  receiver  pending  a 
hearing  of  a  suit  brought  by  the  Comptroller  to  forfeit  a  charter. 

Between  the  date  of  filing  of  the  complaint  and  the  time  fixed 
for  a  trial  of  the  case,  the  United  States  Attorney  telephoned  the 
Comptroller's  office  that  the  president  of  the  defendant  bank  was 
in  his  office  and  had  indicated  a  willingness  to  make  such  changes 
in  the  management  of  the  bank  and  in  its  personnel  as  would 
satisfy  the  Comptroller  of  the  Currency,  if  further  proceedings 


512          ROMANCE  AND  TRAGEDY  OF  BANKING 

would  be  discontinued,  and  requested  an  expression  of  the  Comp- 
troller's views  on  the  subject. 

The  Deputy  Comptroller,  in  the  absence  of  the  Comptroller, 
advised  the  United  States  Attorney  that  the  Comptroller's  office 
had  no  confidence  whatever  in  the  management  of  the  bank  and 
was  satisfied  that  no  permanent  improvement  in  its  condition 
could  be  effected  or  correction  be  made  of  the  abuses  which  had 
prevailed  so  long  while  the  association  remained  in  the  control  of 
the  then  management,  and  that  it  was  his  desire  that  the  suit  to 
forfeit  the  charter  be  vigorously  pressed  to  a  conclusion. 

Later  the  United  States  Attorney  telephoned  that  the  presi- 
dent or  his  counsel  now  proposed  to  reorganize  the  board  of 
directors  and  transfer  the  control  of  the  bank  to  some  of  the  best 
and  most  reputable  bankers  in  the  State  of  Maryland,  and  stated 
that  he  would  submit  the  plan  to  the  Court  if  the  proposition 
met  with  the  approval  of  the  Comptroller's  office. 

The  United  States  Attorney  was  advised  in  reply  that  the 
Comptroller's  office  would  be  satisfied  with  any  plan  which  con- 
templated the  entire  elimination  of  the  Wingerts  from  the  bank, 
who  owned  or  controlled  a  majority  of  the  stock,  the  disposal  of 
their  stockholdings  and  the  election  or  appointment  of  an  entire 
new  board  of  directors,  cashier  and  minor  officers,  but  before  sub- 
mitting any  proposition  to  the  Court  for  a  withdrawal  of  the 
suit  the  directors  should  be  required  to  execute  a  binding  and 
enforceable  contract  specifically  covering  the  agreement,  to  insure 
its  being  carried  out  in  good  faith.  Later  the  United  States 
Attorney  and  Mr.  Alexander  Armstrong,  Attorney  General  for 
Maryland,  called  in  person  at  the  Comptroller's  office  and  sub- 
mitted a  copy  of  the  contract  entered  into  by  the  president  and 
directors  of  the  bank  with  the  parties  who  were  to  succeed  them 
in  control,  by  which  the  entire  stockholdings  of  the  Wingerts  and 
their  interests,  consisting  of  5,500  shares,  would  be  disposed  of 
and  a  new  board  of  directors  appointed,  composed  of  W.  B. 
Lowndes,  first  vice-president  of  the  Fidelity  Trust  Company  of 
Baltimore;  Emory  L.  Coblentz,  president  of  the  Central  Trust 
Company  of  Frederick,  Md.,  and  president  of  the  Hagerstown 
and  Frederick  Railway,  Hambleton  and  Company,  brokers,  of 
Baltimore;  Cyrus  F.  Flook  of  Myersville,  Md.,  connected  with 


ROMANCE  AND  TRAGEDY  OF  BANKING  513 

the  Central  Trust  Company  of  Frederick,  Md. ;  Robert  H.  Mc- 
Cauley,  a  prominent  lawyer  of  Hagerstown,  Md. ;  John  P.  Baer, 
of  Baltimore,  and  Alexander  Armstrong,  Attorney  General  for 
the  State  of  Maryland,  and  vice-president  of  a  Hagerstown  bank. 

Upon  receipt  by  the  United  States  Attorney  of  a  copy  of  the 
agreement  signed  by  the  retiring  members  of  the  board  of  direc- 
tors, to  transfer  control  of  the  bank  to  the  parties  above  men- 
tioned, the  Court,  on  motion  of  the  United  States  Attorney, 
ordered  the  temporary  receiver  withdrawn,  and  the  bank  was  then 
turned  over  to  Directors  Armstrong  and  Baer,  of  the  new  man- 
agement, who  reopened  it  for  business  on  the  morning  of  October 
8,  1921. 

On  October  17,  1921,  one  of  the  defendant  directors  served 
notice  on  the  clerk  of  the  Court  that  he  intended  to  take  an  appeal 
from  the  Court's  order  placing  the  bank  in  the  hands  of  a  tem- 
porary receiver,  pending  a  hearing  of  the  suit  to  forfeit  its  char- 
ter, but  no  further  proceedings  were  had  in  this  connection.  The 
former  directors  having  resigned  to  make  place  for  the  new  board 
and  having  sold  their  stockholdings,  were  no  longer  in  a  position 
to  make  an  appeal  in  the  name  of  the  bank. 

The  vital  question  raised  by  the  appellant  in  this  case  was 
whether  or  not,  in  the  absence  of  any  allegation  of  insolvency, 
the  Court  had  a  right  under  the  circumstances  to  appoint  a 
temporary  receiver  pending  a  hearing  of  the  suit  to  forfeit  the 
charter  of  the  bank.  The  Court  of  Appeals,  on  motion  of  the 
United  States  Attorney,  dismissed  the  appeal,  and  in  doing  so 
took  occasion  to  express  itself  as  follows: 

The  disposition  of  the  case  upon  the  motion  to  dismiss, 
makes  it  unnecessary  to  pass  upon  the  merits  of  the 
original  appointment.  Without  meaning  so  to  do,  we  may 
say,  in  passing,  that  it  appears  to  the  Court  that  the  action 
taken  in  the  circumstances  of  this  case,  was  not  only  in 
the  discretion  of  the  chancellor,  but  that  the  exercise 
thereof  was  wise  and  prudent.  Pomeroy's  Eq.  Jur.  2nd 
Ed.  (1919),  Vol.  4,  Sees.  1537,  1541,  1542.  No  loss  was 
sustained  by  the  appointment  of  the  receiver,  and  it  cer- 
tainly resulted  in  averting  serious  consequences.  The  con- 
trary course  might  have  proven  most  disastrous  from  a 
financial  viewpoint,  to  the  bank  and  all  parties  in  interest. 


514          ROMANCE  AND  TRAGEDY  OF  BANKING 

The  First  National  Bank  of  Hagerstown  was  organized  on 
May  2,  1865,  by  conversion  of  the  Hagerstown  Savings  Bank,  a 
State  institution,  and  was  successfully  and  conservatively  con- 
ducted until  the  Wingert  interests  secured  control  in  January, 
1918.  For  several  years  following  this  change  and  preceding  the 
institution  of  the  suit  to  forfeit  the  charter  of  the  bank,  the  rec- 
ords of  the  Comptroller's  office  show  that  the  bank  under  the 
Wingert  management  was  a  most  persistent  violator  of  the  law, 
and  not  only  deliberately  ignored  the  instructions  of  the  national 
bank  examiners  at  each  examination,  but  openly  and  continuously 
defied  the  admonitions  and  repeated  warnings  of  the  Comptroller 
of  the  Currency,  until  the  Comptroller  was  forced  to  apply  to  the 
Court  for  revocation  of  the  bank's  charter. 

Charters  of  other  national  banks  have  been  revoked  by  order 
of  the  Courts  from  time  to  time  for  various  reasons,  but  the  suit 
brought  in  the  name  of  the  Comptroller  of  the  Currency  to  annul 
the  charter  of  the  First  National  Bank  of  Hagerstown  was  the 
first  and  only  suit  instituted  up  to  that  time  in  the  history  of  the 
national  banking  system  to  revoke  the  charter  of  an  active 
national  banking  association  for  violations  of  the  banking  laws 
in  the  conduct  of  its  business,  and  the  reason  why  no  such  suit 
was  ever  brought  before  is  that  Comptrollers  of  the  Currency  had 
regarded  the  penalty  of  revocation  too  severe  and  drastic  a  meas- 
ure to  be  resorted  to,  in  the  case  of  a  solvent  bank,  if  there  was 
any  hope  of  saving  the  institution  from  compulsory  liquidation 
because  of  the  unlawful  acts  of  its  management.  Therefore  the 
Comptroller  was  very  willing  to  accept  the  offer  of  compromise 
in  the  case  of  the  First  National  Bank  of  Hagerstown  of  a  com- 
plete change  of  management  and  personnel,  and  thus  preserve 
an  old  and  previously  reputable  and  successful  institution  to  its 
patrons  and  the  community  of  Hagerstown. 

Stock  Dividends 

When  the  Supreme  Court  of  the  United  States,  in  an  opinion 
rendered  March  8,  1920,  in  the  case  of  Eisner  vs.  Masumer, 
decided  that  stock  dividends,  when  declared  by  corporations, 
were  not  taxable  as  income,  the  question  was  raised  by  bankers 


ROMANCE  AND  TRAGEDY  OF  BANKING  515 

whether  it  was  permissible  for  national  banks  to  declare  stock 
dividends. 

Prior  to  the  administration  of  Comptroller  Crissinger  it  had 
been  the  uniform  holding  of  the  Comptroller's  office  that  there 
was  no  authority  in  law  for  the  declaration  of  stock  dividends  by 
national  banks,  that  dividends  could  be  lawfully  declared  and  paid 
out  of  net  profits  only  after  deducting  all  losses  and  bad  debts, 
and  that  surplus  earnings  could  be  converted  into  capital  stock 
only  by  the  declaration  of  a  dividend  from  net  profits  in  the  regu- 
lar way,  payable  by  checks,  which,  when  properly  indorsed,  could 
be  accepted  in  payment  for  new  stock. 

Following  the  decision  of  the  Supreme  Court  above  referred 
to,  on  account  of  the  numerous  inquiries  received  at  the  Comp- 
troller's office  on  this  subject,  Comptroller  Williams  referred  the 
question  to  the  Solicitor  of  the  Treasury  for  an  opinion,  and  the 
Solicitor  rendered  an  opinion  sustaining  the  long-maintained 
position  of  the  Comptroller's  office,  that  stock  dividends  were  not 
permissible  by  national  banks.  Not  being  fully  satisfied  with  the 
Solicitor's  opinion,  Comptroller  Williams  referred  the  question 
to  the  Department  of  Justice,  and  the  Acting  Attorney  General, 
in  an  opinion  rendered  in  October,  1920,  ruled  that  national  banks 
cannot  lawfully  declare  stock  dividends.  He  said : 

Section  5199  of  the  Revised  Statutes  authorizes 
directors,  subject  to  certain  restrictions,  to  "declare 
a  dividend  of  so  much  of  the  net  profits  of  the  as- 
sociation as  they  shall  judge  expedient."  Since,  how- 
ever, a  stock  dividend  cannot  be  declared  without  in- 
creasing the  capital  stock,  and  since  the  Acts  of  Congress 
contain  explicit  provisions  as  to  the  manner  in  which  the 
capital  stock  may  be  increased,  a  stock  dividend  cannot  be 
lawfully  declared  unless  the  stock  so  issued  may  be  pro- 
vided for  through  an  increase  of  the  capital,  in  accordance 
with  the  terms  of  this  Section. 

The  question  then  is,  whether  an  increase  of  capital 
for  the  purpose  of  converting  accumulated  earnings  into 
capital  stock  is  permitted  by  the  national  banking  laws. 
Congress  has  seen  fit  to  prescribe,  with  considerable  de- 
tail, the  manner  in  which  the  capital  stock  of  a  national 
bank  may  be  increased. 


516          ROMANCE  AND  TRAGEDY  OF  BANKING 

Section    5142    of    the    Revised    Statutes    provides    that: 

"Any  association  formed  under  this  title  may,  by  its 
articles  of  association,  provide  for  an  increase  of  its 
capital  from  time  to  time,  as  may  be  deemed  expedient, 
subject  to  the  limitations  of  this  title.  But  the  maximum 
of  such  an  increase  to  be  provided  in  the  articles  of  associa- 
tion shall  be  determined  by  the  Comptroller  of  the  Cur- 
rency; and  no  increase  of  capital  shall  be  valid  until  the 
whole  amount  of  such  increase  is  paid  in,  and  notice  thereof 
has  been  transmitted  to  the  Comptroller  of  the  Currency, 
and  his  certificate  obtained,  specifying  the  amount  of  such 
increase  of  capital  stock,  with  his  approval  thereof,  and 
that  it  has  been  duly  paid  in  as  part  of  the  capital  of  such 
association." 

It  will  be  observed  that  this  Section  authorizes  a  bank, 
at  the  time  of  its  organization,  to  provide  in  its  articles 
of  association  for  an  increase  in  the  future  of  its  capital, 
fixing  a  limit  to  the  amount  of  such  increase,  subject  to 
the  approval  of  the  Comptroller  of  the  Currency.  It  is 
then  expressly  provided  that,  in  exercising  the  authority 
so  provided  for,  no  increase  of  capital  shall  be  valid  until 
the  whole  amount  of  such  increase  "is  paid  in,"  and  that  it 
must  be  certified  to  the  Comptroller  of  the  Currency  that 
this  amount  "has  been  duly  paid  in  as  part  of  capital  of 
such  association."  Apparently,  it  was  thought  that  this 
Section  did  not  authorize  an  increase  of  capital  in  any 
case  in  which  such  increase  was  not  provided  for  in  the 
articles  of  association,  and  to  make  provision  for  an  in- 
crease in  cases  not  provided  for  by  the  articles  of  associa- 
tion, the  amendatory  Act  of  May  1,  1866,  was  passed 
providing — 

"That  any  national  banking  association  may,  with  the 
approval  of  the  Comptroller  of  the  Currency,  by  the  vote 
of  shareholders  owning  two-thirds  of  the  stock  of  such 
association,  increase  its  capital  stock,  in  accordance  with 
existing  laws,  to  any  sum  approved  by  the  said  Comptroller, 
notwithstanding  the  limit  fixed  in  its  original  articles 
of  association  and  determined  by  said  Comptroller;  and  no 
increase  of  the  capital  stock  of  any  national  banking  as- 
sociation either  within  or  beyond  the  limit  fixed  in  its 
original  articles  of  association  shall  be  made  except  in  the 
manner  herein  provided." 


ROMANCE  AND  TRAGEDY  OF  BANKING  517 

It  is  thus  enacted  that  no  increase  of  capital  stock 
shall  be  valid  unless  the  amount  "has  been  duly  paid  in  as 
part  of  the  capital  of  such  association."  And  this  is  coupled 
with  an  expressed  prohibition  against  the  increase  of  capital 
in  any  other  manner.  The  issuance  of  a  stock  dividend,  it 
has  been  held,  does  not  make  the  stockholder  richer  or  the 
corporation  poorer.  It  simply  changes  the  evidence  of 
the  stockholders'  title  of  what  he  already  owned.  *  * 
It  would  seem,  therefore,  that  the  mere  conversion,  by  a 
corporation  of  earnings  which  it  already  owns,  into  capital 
stock,  and  thus  keeping  in  its  business  permanently  what 
it  previously  was  at  liberty  to  distribute  among  stock- 
holders, is  not  equivalent  to  paying  in  an  equal  amount  of 
money  as  a  part  of  the  capital  of  the  corporation.  No  part 
of  it  has  been  paid  in  to  the  corporation.  It  has  been 
earned  by  the  corporation  as  a  profit,  and  I  cannot  think 
that  the  conversion  of  it  into  capital  stock  will  be  an 
increase  of  capital  in  the  manner  provided  by  the  Acts 
of  Congress. 

It  may  be  said,  of  course,  that  so  far  as  the  corpora- 
tion is  concerned  the  result  of  declaring  a  stock  dividend 
is  not  different  from  what  is  accomplished  by  declaring  a 
cash  dividend  which  is  used  by  the  stockholders  to  pay 
for  additional  stock,  but  I  think  Congress  has  expressed 
an  intention  that  it  shall  be  done  in  the  one  way  and  not 
in  the  other.  A  very  good  reason  I  think,  which  may 
have  moved  Congress,  is  that  a  stockholder  in  a  national 
bank  incurs  a  liability  for  the  debts  of  the  bank  to  the 
extent  of  the  amount  of  his  stock,  and  it  may  very  well 
have  been  considered  unwise  to  permit  two-thirds  of  the 
stockholders  to  increase  this  liability  of  the  minority  by 
increasing  the  capital  stock  through  the  issuance  of  stock 
dividends. 


While  the  Solicitor  of  the  Treasury  is  the  Statutory  Counsel 
of  the  Comptroller  of  the  Currency,  his  opinion  and  the  opinion 
of  the  Attorney  General  concerning  questions  of  this  character 
are  not  binding  on  the  Comptroller.  The  Comptroller  of  the  Cur- 
rency is  free  to  follow  his  own  judgment  in  such  matters  until 
overruled  by  a  court  of  competent  jurisdiction. 


518          ROMANCE  AND  TRAGEDY  OF  BANKING 

Exercising  this  prerogative,  Mr.  Crissinger,  in  disposing  of 
this  question  on  December  20,  1921,  ruled  as  follows: 

It  has  been  my  view  that  the  National  Bank  Act 
should  be  liberally  construed  in  all  matters  in  which  there 
is  not  a  direct  inhibition  in  the  charter  or  in  the  law  as 
enacted  by  Congress.  Having  that  view,  I  find  myself 
unable  to  agree  with  the  distinguished  solicitors  in  the  con- 
clusion they  arrive  at. 

If  any  question  of  public  policy  could  be  involved  in 
the  authorization  of  stock  dividends  out  of  undivided  profits, 
it  would  seem  to  me  to  be  all  in  favor  of  granting  such 
permission,  for  the  reason  that  the  stock  does  incur  a  double 
liability  and  to  that  extent  offers  further  assurance  of 
security  and  protection  to  creditors  and  people  doing  busi- 
ness with  the  bank.  The  right  is  inherent  in  the  board  of 
directors  to  declare  a  dividend  to  absorb  all  of  the 
earnings  of  the  bank  outside  of  that  which  is  required  to  be 
set  aside  for  surplus  purposes,  and  they  also  have  the  in- 
herent right  of  carrying  such  earnings  to  surplus,  and  I  am 
of  the  opinion  that  in  the  case  of  the  profits  being  insuf- 
ficient to  pay  dividends,  that  they  have  the  inherent  right 
to  transfer  the  surplus  back  to  undivided  profits  for  the 
purpose  of  paying  dividends.  If  I  am  correct  in  these 
conclusions,  then  the  surplus  or  such  portion  of  it  as  may 
be  authorized  by  the  board  of  directors  may  be  returned 
to  the  undivided  profits  for  the  purpose  of  paying  an  an- 
nual dividend  or  for  the  purpose  of  distribution,  either  in 
cash  or  by  a  stock  dividend.  Before  a  stock  dividend 
can  be  ordered  it  is  necessary  to  have  the  articles  of  in- 
corporation so  amended  as  to  increase  the  capitalization  of 
the  bank  for  that  purpose.  When  that  is  done  pursuant 
to  law,  the  directors  certainly  could  either  sell  the  new 
stock,  giving  the  stockholders  their  right  as  provided  by 
statute  of  taking  the  stock,  or  the  directors  could  pro  rate 
it  to  the  stockholders  in  proportion  to  their  holdings  before 
the  increase  and  issue  to  the  stockholders  of  a  stock  divi- 
dend from  the  surplus  transferred  to  the  undivided  profits. 
It  is  my  opinion  that  nobody  has  the  right  to  complain 
of  such  transaction  when  the  increased  capitalization  is 
legally  authorized  except  a  stockholder,  and  I  have  my  very 
serious  doubts  whether  such  stockholder  can  object,  but 


ROMANCE  AND  TRAGEDY  OF  BANKING  519 

in  the  event  of  such  objection  it  is  purely  a  matter  for  the 
stockholders  and  the  dissenting  stockholder,  and  not  one  for 
this  Bureau  to  control. 

Having  these  views  of  the  law  I  made  the  order  which 
became  necessary  originally  in  order  to  protect  certain 
banks  that  were  in  difficulty  and  in  exercising  my  discretion 
to  protect  the  banks  so  in  difficulty,  I  found  it  necessary 
to  give  a  liberal  construction  to  those  provisions  of  the 
National  Bank  Act  in  the  matter  of  dividends  instead  of 
the  strict  and  rigid  construction  heretofore  given  to  statutes, 
which  certainly  in  administrative  matters  should  be  liberally 
construed;  especially  so  when  the  public  interest  is  best 
conserved  by  so  doing  and  when  the  interests  of  stock- 
holders are  not  in  any  way  put  in  jeopardy.  It  will  be 
understood,  therefore,  that  the  decision  to  authorize  stock 
dividends  when  complying  with  the  requirements  of  the 
office  in  issuing  them  is  of  my  own  initiative  and  I  take 
entire  responsibility  for  the  same. 

Whether  all  the  Comptrollers  of  the  Currency  from  the  estab- 
lishment of  the  National  Banking  System  to  the  date  of  this  rul- 
ing were  wrong  in  their  position,  and  Comptroller  Crissinger  was 
right  in  reversing  them,  can  be  determined  finally  only  by  a  court 
of  competent  jurisdiction. 

The  Fort  Dearborn  National  Bank  of  Chicago 

During  an  examination  of  the  Fort  Dearborn  National  Bank 
of  Chicago  by  the  clearing  house  examiners,  commencing  Novem- 
ber 15,  1921,  a  condition  was  disclosed  which,  but  for  the  prompt 
and  co-operative  action  of  the  clearing  house  banks,  undoubtedly 
would  have  developed  into  the  most  serious  financial  situation 
that  had  threatened  the  city  of  Chicago  and  the  surrounding  ter- 
ritory for  a  number  of  years,  and  would  have  resulted  also  in  the 
failure  of  the  Fort  Dearborn  National  Bank  and  the  Fort  Dear- 
born Trust  and  Savings  Bank,  an  affiliated  institution,  with  all 
the  disturbing  and  disastrous  consequences  that  usually  follow 
the  failure  of  financial  institutions  of  the  size  and  importance  of 
these  two  banks. 


520 

The  collapse  of  the  Fort  Dearborn  National  Bank  was  the 
result  of  a  series  of  events. 

About  fifty  per  cent,  of  the  stock  of  this  bank  was  owned  by 
the  Tilden  interest  and  the  management  of  the  bank  was  practi- 
cally, if  not  wholly,  in  the  hands  of  the  Tildens. 

The  Edward  Tilden  estate  under  the  management  of  Averill 
Tilden,  a  director  of  the  Fort  Dearborn  National  Bank,  had 
hypothecated  about  21,000  shares  of  the  stock  of  the  bank  as 
collateral  for  loans  from  various  banks,  totalling  around  $4,000,- 
000.  In  addition  to  the  borrowings  on  the  security  of  this  stock 
the  Tilden  interest  became  interested  in  other  enterprises,  under- 
writings  and  financing  of  heavy  mercantile,  manufacturing  and 
realty  ventures,  some  of  which  were  more  or  less  speculative.  The 
general  business  depression  affected  many  of  these  loans. 

The  companies  financed  were  those  in  which  the  Tildens  and 
their  associates  were  largely  interested,  and  it  appears  that  cor- 
respondent banks  of  the  Fort  Dearborn  National  Bank,  and 
their  connections,  were  very  freely  used  in  placing  these  loans, 
both  on  collateral  and  on  open  lines  of  credit. 

For  a  year  or  more  previous  to  the  closing  of  the  banks  the 
various  industries  in  which  the  Fort  Dearborn  bank,  through  the 
Tilden  connections,  was  incidentally  interested  had  been  very 
extensively  advertising,  the  publicity  end  of  the  business  having 
been  conducted  by  John  Fletcher,  who,  it  appears,  was  also  inter- 
ested in  the  enterprises  advertised  and  was  liberally  compensated 
as  their  financial  agent.  He  was  connected  with  the  various  con- 
cerns officially  and  at  the  same  time  was  an  active  vice-president 
of  the  Fort  Dearborn  banks,  national  and  state.  Through  the 
financing  of  these  many  industries  and  interests  the  Tildens 
became  heavily  over-extended  and  embarrassed. 

On  December  28,  1921,  Mr.  William  A.  Tilden,  president  of 
the  Fort  Dearborn  National  Bank,  approached  the  officers  of  the 
First  National  Bank  of  Chicago  with  a  proposition  for  that  bank 
to  purchase  the  assets  of  the  Fort  Dearborn  National  and  assume 
its  liabilities,  and  an  arrangement  was  made  for  an  immediate  ex- 
amination of  the  assets  of  the  latter  bank.  After  the  entire 
credit  department  and  auditing  force  of  the  First  National  had 
devoted  all  day  Saturday,  December  31,  and  the  following  Sun- 


ROMANCE  AND  TRAGEDY  OF  BANKING  521 

day  and  Sunday  night  to  an  examination  of  the  assets  of  the 
Fort  Dearborn  National,  the  First  National  Bank  declined  to 
favorably  entertain  the  proposition  on  the  ground  that  the 
amount  of  the  liquid  assets  of  the  bank  was  insufficient  to  war- 
rant the  First  National  in  assuming  its  liabilities. 

The  immediate  and  precipitating  cause,  therefore,  of  the  col- 
lapse of  the  Fort  Dearborn  National  Bank  and  its  affiliated  insti- 
tution, the  Fort  Dearborn  Trust  and  Savings  Bank,  may  be 
attributed  to  the  failure  of  the  negotiations  with  the  First  Na- 
tional by  the  president  of  the  Fort  Dearborn  National  to  take 
over  the  assets  of  the  latter  and  assume  its  liabilities,  which  ap- 
peal was  necessitated  by  the  embarrassment  of  the  Edward  Tilden 
Company  because  of  the  inability  of  the  company  to  finance  any 
further  the  corporations  with  which  it  was  connected,  or  to  meet 
the  maturing  demands  upon  its  own  and  affiliated  companies.  The 
affairs  of  the  Edward  Tilden  Company,  Merrill,  Cox  &  Com- 
pany, the  Earl  Motors  Company,  Inc.,  and  various  other  enter- 
prises in  which  the  Tildens  and  their  associates  were  interested  or 
were  assisting  in  financing,  were  placed  in  the  hands  of  a  committee 
of  their  creditors  for  adjustment,  which  fact  increased  the  diffi- 
culty of  accurately  appraising  the  assets  of  the  bank,  as  the  finan- 
cial worth  of  the  individual  and  corporate  borrowers  from  the 
bank  depended  largely  upon  the  favorable  outcome  of  their  inter- 
woven interests. 

When  the  First  National  Bank  declined  to  entertain  favorably 
the  proposition  of  Mr.  Tilden,  a  meeting  of  the  clearing  house 
was  called  for  Monday  morning,  January  2,  1922,  for  the 
purpose  of  considering  the  best  means  of  liquidating  the  Fort 
Dearborn  National  Bank  through  one  of  the  clearing  house  banks 
and  thereby  averting  what  threatened  to  become  a  most  disas- 
trous failure,  not  only  of  the  national  bank  but  also  of  the  Fort 
Dearborn  Trust  and  Savings  Bank,  its  affiliated  institution.  At 
this  conference  it  was  finally  agreed  that  the  Continental  and 
Commercial  National  Bank  should  take  over  the  assets  of  the 
Fort  Dearborn  National,  and  that  the  Continental  and  Commer- 
cial Trust  and  Savings  Bank  should  take  over  the  assets  of  the 
Fort  Dearborn  Trust  and  Savings  Bank,  and  that  each  should 
assume  the  liabilities  of  the  bank  taken  over. 


522          ROMANCE  AND  TRAGEDY  OP  BANKING 

The  agreement  also  provided  that  in  order  to  induce  the  Con- 
tinental and  Commercial  National  Bank  to  enter  into  the  agree- 
ment to  take  over  the  business  of  the  Fort  Dearborn  National 
Bank,  the  clearing-house  banks  would,  on  January  3,  1922,  make 
deposits  in  the  Fort  Dearborn  National  Bank  aggregating 
$1,000,00^0,  and  would  accept  from  the  Fort  Dearborn  National 
Bank  for  such  deposits,  deferred  certificates  of  deposit,  payable 
January  3,  1924,  bearing  interest  at  the  rate  of  five  per  cent. 
per  annum,  from  date.  This  one  million  dollars  was  to  consti- 
tute and  be  a  part  of  the  assets  taken  over  by  the  Continental  and 
Commercial  National  Bank,  and  no  part  of  the  one  million  dollars 
thus  contributed  was  to  be  repaid  to  the  contributing  banks  until 
all  liabilities  of  the  Fort  Dearborn  National  Bank  assumed  by  the 
Continental  National  Bank,  together  with  interest  on  said  liabili- 
ties assumed,  at  the  rate  of  five  per  cent,  per  annum,  had  been  re- 
paid to  the  Continental  National  Bank  and  liquidated  in  full. 

It  is  understood  that  a  similar  agreement  was  entered  into 
between  the  Fort  Dearborn  Trust  and  Savings  Bank  and  the 
Continental  and  Commercial  Trust  and  Savings  Bank. 

The  real  elements  of  danger  in  and  the  primary  cause  of  the 
enforced  merger  of  these  institutions  were  their  domination  by  the 
Tilden  interests  and  the  too  free  use  of  the  funds  of  the  bank  by 
such  interests  for  their  self-serving  purposes.  The  banks  were 
managed  largely,  if  not  altogether,  by  directors  who  were  either 
active  officers,  or  were  heavily  and  continuously  indebted  to  the 
institutions  and  connected  with  the  borrowing  concerns,  thereby 
making  it  necessary  for  the  banks  to  borrow  large  sums  of  money 
to  enable  them  to  carry  these  lines  of  credit. 

At  the  time  of  the  examination  of  the  Fort  Dearborn  National 
Bank  in  November,  1921,  by  the  national  bank  examiner,  the 
liabilities  of  the  bank  to  the  Federal  Reserve  Bank  for  rediscounts 
were  reported  to  be  over  $12,876,000,  paper  classed  as  slow 
amounted  to  over  $5,000,000,  doubtful  paper  to  over  $6,800,000 
and  undesirable  assets  to  over  $8,700,003. 

At  the  time  of  the  examination  by  the  clearing  house  examiner 
the  early  part  of  the  same  month,  he  required  the  bank  to  charge 
off  as  a  loss  over  $800,000. 


ROMANCE  AND  TRAGEDY  OF  BANKING  523 

The  total  deposits  of  the  two  national  banks  and  the  two 
trust  companies  after  the  merger  aggregated  over  $400,000,000 
and  their  total  resources  over  $525,000,000. 

The  merger  of  these  two  national  banks,  therefore,  made  the 
Continental  and  Commercial  National  Bank  the  second  largest 
national  bank  in  the  United  States. 

Extension  of   Charters   of  National  Banks  for   the  Period   of 
Ninety-Nine  Years 

National  banks,  the  charters  of  which  were  extended  by  the 
Acts  of  July  12,  1882,  and  April  12,  1902,  began  to  expire  in 
July,  1922,  making  it  necessary  that  some  steps  should  be  taken 
to  provide  for  a  further  extension  of  the  charters  of  such  banks. 

Comptroller  Crissinger,  therefore,  submitted  to  Congress  two 
bills  designed  to  accomplish  this  purpose ;  one  providing  for  a  fur- 
ther extension  for  a  period  of  twenty  years  in  the  same  manner  as 
had  been  provided  for  in  the  first  and  second  extensions  by  the 
previous  acts ;  and  the  second  bill  granting  perpetual  extensions 
of  charters  of  all  existing  banks,  and  providing  that  future  banks 
should  have  perpetual  charters. 

This  latter  bill  was  taken  up  by  the  House  of  Representatives 
and  passed,  but  was  amended  by  the  Senate  so  as  to  fix  the  period 
of  the  corporate  existence  of  all  national  banks  at  ninety-nine 
years.  The  bill  was  passed  practically  in  this  form  and  approved 
by  the  President,  July  1,  1922. 

By  this  latter  act  the  charters  of  all  national  banks  in  exist- 
ence July  1,  1922,  were  automatically  extended  for  the  period  of 
ninety-nine  years  from  that  date,  and  the  charters  of  all  banks 
subsequently  organized  are  to  be  for  a  like  period  from  the  date  of 
their  organization. 

The  granting  of  a  perpetual  charter,  however,  was  consid- 
ered more  desirable  from  the  standpoint  of  banks  that  were  au- 
thorized to  exercise  fiduciary  powers. 

Branch  Banks  or  Branch  Offices 

In  a  previous  chapter  of  this  book  Comptroller  Lacey  was 
quoted  as  saying  in  one  of  his  annual  reports,  that : 


524          ROMANCE  AND  TRAGEDY  OF  BANKING 

Banks  are  indispensable  to  the  successful  conduct  of  the 
various  business  enterprises  which  form  a  prominent  fea- 
ture in  modern  civilization.  These  agencies  must  keep 
pace  with  the  progress  made  in  manufactures,  in  commerce, 
and  in  all  forms  of  industrial  activities,  or  serious  embar- 
rassments will  surely  follow.  The  national  system  must 
occupy  the  field  or  give  way  to  another. 

Mr.  Crissinger  practically  exemplified  this  suggestion  of  Mr. 
Lacey  on  the  question  of  the  right  of  national  banks  to  establish 
and  operate  branch  offices  in  competition  with  State  institutions 
which  have  that  authority  under  State  statutes.  This  privilege 
or  advantage  which  State  banks  have  over  national  associations 
has  induced  many  national  banks  in  recent  years  to  leave  the 
national  banking  system  and  reorganize  under  State  authority. 

The  opening  of  a  branch  bank  by  the  First  National  Bank  of 
St.  Louis,  Missouri,  in  June,  1922,  and  similar  action  taken  by  a 
number  of  the  larger  national  banks  in  other  sections  of  the 
country  and  threatened  by  others,  brought  this  issue  to  such  an 
acute  stage  that  Mr.  Crissinger  found  it  necessary  to  look  care- 
fully into  the  law  on  the  subject  to  determine  whether  there  was 
any  way  through  administrative  regulation  of  solving  this  ques- 
tion and  affording  national  banks  the  relief  they  sought.  After  a 
careful  and  thorough  consideration  of  the  whole  subject  and 
consultation  with  recognized  legal  authorities  the  conclusion  was 
reached  that  while  national  banks  had  no  authority  under  existing 
law  to  establish  and  operate  branches,  it  was  considered  per- 
missible under  the  law  for  them  to  establish  and  operate  additional 
offices  or  agencies  in  the  same  place  where  they  are  authorized  to 
do  business. 

As  the  law  has  not  been  amended  in  this  respect  since  1864, 
except  as  to  foreign  branches  authorized  by  the  Federal  Reserve 
Act,  it  is  inconceivable  that  the  National  Bank  Act  should  have 
been  in  existence  nearly  sixty  years  without  someone  having  dis- 
covered that  the  act  permitted  the  exercise  of  the  very  power  that 
many  of  the  banks  have  been  clamoring  for  since  the  date  of  its 
original  enactment  in  1863. 


ROMANCE  AND  TRAGEDY  OF  BANKING  525 

Although  Mr.  Crissinger  up  to  August  30,  1922,  had  issued 
no  official  ruling  on  the  subject  in  his  correspondence  with  individ- 
ual bankers  and  others,  he  expressed  the  opinion  that  : 

While  a  national  bank  was  chartered  to  do  business  in 
a  certain  place,  it  was  not  restricted  to  a  particular  loca- 
tion in  that  place,  and  that  there  is  no  limitation  upon 
the  number  of  offices  or  banking  houses  it  may  have  in 
which  to  do  business  in  the  place  of  its  location  as  long 
as  these  additional  offices  are  controlled  and  operated  by 
the  same  board  of  directors  and  the  same  officers. 

Mr.  Crissinger  also  stated  that  he  was  of  the  opinion  that: 

This  view  was  and  had  been  sustained  by  the  national 
banking  laws  ever  since  their  enactment  in  1863. 

The  National  Bank  Act  authorizes  the  doing  of  busi- 
ness in  a  certain  place,  and  there  is  a  clear  dis- 
tinction between  a  branch  bank  and  an  additional  place 
of  business  in  the  city  where  the  bank  is  authorized 
to  do  business.  He  contended  that  the  law  does  not 
mean  that  the  bank's  business  must  be  done  in  one  banking 
office  or  in  one  banking  house  in  that  place,  but  that  the 
national  bank  act  clearly  authorizes  the  bank  to  do  business 
in  as  many  banking  houses  or  offices  in  that  place,  as 
may  be  necessary  to  carry  on  the  business  for  which  it  was 
incorporated,  and  that  the  corporate  authorization  empowers 
the  bank  to  do  all  the  business  that  may  be  entrusted  to  it. 
The  implied  and  incidental  powers  secured  to  the  bank 
by  its  charter  clearly  clothe  the  directors  with  the  power 
to  furnish  enough  offices  and  banking  house  facilities  in 
which  to  properly  conduct  the  proffered  business  in  the 
place  of  its  domicile  fixed  by  the  bank's  charter. 

This  opinion  of  Mr.  Crissinger,  however,  is  contrary  to  the 
position  of  the  Comptroller's  office  on  this  subject  since  the  estab- 
lishment of  the  bureau. 

Section  11  of  the  original  National  Bank  Act,  approved  Feb- 
ruary 25,  1863,  reads : 


526          ROMANCE  AND  TRAGEDY  OP  BANKING 

and  their  usual  business  shall  be  transacted  in  banking 
offices  located  in  the  places  specified  respectively  in  its 
certificate  of  association  and  not  elsewhere. 

This  provision  bears  out  Mr.  Crissinger's  contention  and  would 
seem  to  comtemplatc  that  the  intent  of  this  act  was  to  permit  the 
banks  to  maintain  more  than  one  banking  house  or  office,  but  the 
Act  of  1863,  it  will  be  remembered,  was  repealed  in  its  entirety  by 
the  Act  of  June  3,  1864,  and  Section  8  of  the  latter  act  provides : 

and  its  usual  business  shall  be  transacted  at  an  office 
or  banking  house  located  in  the  place  specified  in  its  or- 
ganization certificate. 

It  will  be  noted,  therefore,  that  the  words  "banking  offices" 
in  the  Act  of  1863  were  changed  in  the  amendment  to  read  "office 
or  banking  house,"  and  the  word  "places"  was  changed  to  read 
"place,"  thus  implying  that  Congress  intended  by  the  amendment 
that  a  bank  should  be  permitted  to  have  but  one  office  or  banking 
house. 

This  has  been  the  interpretation  of  the  law  by  every  Comp- 
troller of  the  Currency  from  Mr.  McCulloch  to  Mr.  Williams,  in- 
clusive, the  immediate  predecessor  of  the  present  Comptroller, 
Mr.  Crissinger,  and  this  construction  of  the  law  has  been  sus- 
tained by  every  Solicitor  of  the  Treasury  during  that  entire 
period  and  by  Attorney  General  Wickersham  in  an  opinion  writ- 
ten by  Assistant  Attorney  General  J.  A.  Fowler  under  date  of 
May  11, 1911,  in  the  case  of  the  Lowry  National  Bank  of  Atlanta, 
Georgia. 

Banks  applying  to  Comptroller  Crissinger  for  permission  to 
open  additional  offices  were  required  to  file  a  resolution  adopted  by 
the  board  of  directors  authorizing  the  proper  officers  to  make 
application  to  the  Comptroller  of  the  Currency  for  permission 
to  establish  an  additional  office  or  offices.  Under  the  Comptrol- 
ler's regulation  the  application  was  required  to  show  the  particu- 
lar locality  at  which  it  was  desired  to  open  such  office,  the  neces- 
sity for  the  establishment  of  the  office,  the  population  to  be 
served  therefrom,  the  distance  of  the  nearest  bank  from  the  point 
of  location  of  the  proposed  office,  the  amount  of  capital  and  sur- 


ROMANCE  AND  TRAGEDY  OF  BANKING  527 

plus  of  the  applying  bank,  and  the  ability  of  the  bank  to  meet 
the  demands  of  the  business  community  in  the  section  which  it  was 
proposed  to  supply,  etc.,  etc. 

Up  to  the  time  of  this  writing  (August  30,  1922),  twenty- 
five  banks,  located  in  different  sections  of  the  country,  had  been 
granted  permission  to  open  additional  offices. 

Proposed  Abolition  of  the  Comptroller's  Office 

During  the  last  year  or  two  of  the  administration  of  Mr. 
Williams  a  strong  movement  developed  in  favor  of  the  abolition 
of  the  office  of  Comptroller  of  the  Currency  by  merging  the 
bureau  with  the  Federal  Reserve  Board  and  transferring  the 
functions,  powers  and  duties  of  the  Comptroller  to  that  board. 

Bills  were  introduced  in  both  houses  of  Congress  designed  to 
effect  this  consolidation.  These  bills,  however,  might  have  been 
more  appropriately  designated  as  "Bills  to  abolish  John  Skelton 
Williams,"  as  the  demand  for  such  legislation  seemed  to  come 
mainly,  if  not  wholly,  from  bankers  to  whom  Mr.  Williams  was 
personally  obnoxious,  from  some  of  the  members  of  the  Federal 
Reserve  Board  who,  unfortunately,  had  had  disagreements  or 
differences  with  him  in  regard  to  the  policies  of  the  board,  or  to 
his  policies  of  administration  of  the  Comptroller's  office,  and  from 
the  twelve  Federal  Reserve  Banks  whose  officers  were  exceedingly 
desirous  of  supplanting  the  Comptroller  of  the  Currency  in  the 
supervision  of  all  the  national  banks  and  of  absorbing  his  duties. 
Demands  for  the  consolidation  of  the  two  offices,  however,  appar- 
ently subsided  immediately  following  the  retirement  of  Mr.  Wil- 
liams from  office  on  March  2,  and  the  hearings  on  the  bills  before 
Congress,  which  had  been  deferred  from  time  to  time  by  the  re- 
spective committees  of  the  two  houses  which  had  them  under 
consideration,  were  indefinitely  postponed,  thus  indicating  that 
the  movement  for  consolidation  of  the  two  bureaus  was  due  more 
to  dissatisfaction  with  Mr.  Williams  personally  and  his  policies 
of  administration  of  the  Comptroller's  office  than  to  a  sincere  de- 
sire for  the  abolition  of  the  office  and  the  transfer  of  its  manifold 
duties  and  responsibilities  to  the  Federal  Reserve  Board.  This 
conclusion  was  further  exemplified  by  the  fact  that  many  bankers 


528          ROMANCE  AND  TRAGEDY  OF  BANKING 

throughout  the  country  and  in  Congress  who  had  at  first  strongly 
favored  the  movement  during  Mr.  Williams'  incumbency  of  the 
office  of  Comptroller  subsequently  became  either  indifferent  or 
strongly  opposed  to  it  after  his  retirement  from  office. 

It  was  contended  by  those  who  favored  a  merger,  and  the 
same  impression  seemed  to  prevail  among  Congressmen  generally, 
that  there  was  more  or  less  duplication  of  work  in  the  operation 
of  the  two  offices  independently  or  separately,  which  could  be 
avoided  and  the  business  more  economically  and  efficiently  con- 
ducted if  they  were  consolidated  in  one  bureau  under  one  control. 
But  in  this  they  were  in  error.  There  is  not  now  and  never  has 
been  any  duplication  of  the  work  of  the  Federal  Reserve  Board 
by  the  office  of  the  Comptroller  of  the  Currency,  nor  of  the  Comp- 
troller's office  by  the  Federal  Reserve  Board.  The  business  of 
each  bureau  is  wholly  distinct  and  separate  from  the  other,  but 
the  Comptroller's  office  is  and  has  been  from  the  beginning  much 
more  economically  administered  than  the  office  of  the  Federal 
Reserve  Board,  as  may  be  clearly  demonstrated  by  comparison 
of  expenses  and  volume  of  work  performed. 

The  Comptroller  of  the  Currency  in  the  supervision  of  the  na- 
tional banks  makes  not  less  than  five  calls  each  year  upon  the 
banks  for  a  report  of  their  condition.  These  reports  of  condition 
are  carefully  examined  and  abstracted  by  experienced  clerks  of 
the  Comptroller's  office  and  these  reports  and  abstracts  are  as 
available  at  all  times  to  the  proper  officials  of  the  Federal  Reserve 
Board  as  if  the  board  itself  called  on  the  banks  for  the  reports 
and  its  own  clerks  abstracted  them. 

The  national  bank  examiners  employed  by  the  Comptroller 
of  the  Currency  are  required  to  make  not  less  than  two  examina- 
tions of  every  national  bank  each  year.  These  reports  are  on  file 
in  the  Comptroller's  office  and  are  accessible  to  the  proper  officers 
of  the  Federal  Reserve  Board  at  any  time. 

It  will,  therefore,  readily  be  seen  that  there  is  and  has  been 
no  duplication  of  this  work  and  no  necessity  for  any  duplication. 

All  the  correspondence  with  national  banks  and  with  national 
bank  examiners  growing  out  of  the  conditions  shown  by  these 
reports  is  conducted  by  the  Comptroller's  office  force  and  such 


ROMANCE  AND  TRAGEDY  OF  BANKING  529 

correspondence  is  also  as  readily  accessible  to  the  officials  of  the 
Federal  Reserve  Board  as  if  conducted  by  that  office. 

The  Comptroller  of  the  Currency  is  charged  by  law  with  the 
duty  of  issuing  Federal  Reserve  notes  and  Federal  Reserve  Bank 
notes  and  the  Federal  Reserve  Issue  Division  is  a  part  of  the 
Comptroller's  office  and  is  located  in  that  bureau.  There  is, 
therefore,  no  duplication  of  this  work. 

The  Federal  Reserve  Board  is  required  to  call  upon  the  State 
banks  and  trust  companies  which  are  members  of  the  Federal 
Reserve  System  for  reports  of  condition  not  less  than  three  times 
each  year.  The  Comptroller  of  the  Currency  notifies  the  Federal 
Reserve  Board  in  advance  when  he  contemplates  making  a  call 
upon  the  national  banks  for  a  report  of  their  condition,  and  the 
Federal  Reserve  Board  makes  a  call  on  the  State  member  banks  for 
a  report  for  the  same  date,  but  not  more  than  three  times  a  year. 
The  Federal  Reserve  Board  makes  its  calls  through  the  Federal 
Reserve  Banks  and  the  State  member  banks  make  their  reports  in 
duplicate  direct  to  the  Federal  Reserve  Bank  of  their  respective 
districts.  The  Federal  Reserve  Banks  retain  one  copy  of  the 
report  and  forward  the  other  to  the  Federal  Reserve  Board  at 
Washington. 

These  reports  are  abstracted  by  the  statistical  division  of  the 
Federal  Reserve  Board  the  same  as  the  reports  of  national  banks 
are  abstracted  by  the  statistical  division  of  the  Comptroller's 
office.  There  is,  therefore,  no  duplication  of  this  work. 

The  Federal  Reserve  Banks  make  weekly  or  daily  reports  to 
the  Federal  Reserve  Board  as  may  be  required  by  the  board. 

There  is  absolutely  no  more  duplication  of  work  in  any 
branch  of  the  business  of  the  two  bureaus  than  there  is  between 
the  divisions  of  the  respective  offices.  The  work  of  each  bureau 
is  wholly  separate  and  distinct  from  the  other  and  no  good  rea- 
son exists,  from  the  standpoint  of  efficiency,  expedition  or  econ- 
omy, for  the  consolidation  of  the  two  bureaus. 

The  Federal  Reserve  Banks  from  the  very  beginning  of  their 
existence  have  strongly  favored  and  persistently  urged  the  ab- 
sorption of  the  Comptroller's  functions  by  the  Federal  Reserve 
Board  and  the  abolition  of  the  office  of  Comptroller  of  the  Cur- 
rency. These  banks  have  been  principally  instrumental  and 


530          ROMANCE  AND  TRAGEDY  OF  BANKING 

active  in  keeping  alive  the  agitation  of  this  question  and  are  ap- 
parently influenced  wholly  by  a  desire  or  ambition  to  enlarge 
their  own  authority  or  powers  by  having  the  national  banks  in 
their  respective  Federal  Reserve  districts  placed  under  their 
exclusive  supervision  and  control.  They  contend  that  the  na- 
tional banks  have  now  increased  in  number  to  such  an  extent  as 
to  render  effective  and  satisfactory  supervision  by  a  centralized 
authority  at  Washington  practically  and  physically  impossible, 
and,  therefore,  they  recommend  and  urge  that  this  supervisory 
authority  be  divided  among  the  twelve  Federal  Reserve  Banks, 
each  to  have  supervision  and  control  of  the  member  banks  com- 
prising its  Federal  Reserve  district.  In  other  words,  instead  of 
having,  as  now,  a  Comptroller  of  the  Currency  at  Washington 
performing  his  duties  under  the  general  direction  of  the  Secretary 
of  the  Treasury,  and  a  uniform  interpretation  of  the  national 
banking  laws  and  regulations  for  the  guidance  of  all  banks  and 
bank  examiners  alike,  it  is  proposed  to  decentralize  this  authority, 
when  the  tendency  of  the  age  is  toward  centralization,  and  scatter 
it  to  the  four  winds  of  the  country  by  creating  twelve  little  Comp- 
troller's offices  and  placing  the  banks  in  their  respective  territo- 
ries under  their  exclusive  supervision  and  control. 

Under  such  a  system  it  must  be  conceded  that  confusion  can- 
not but  be  the  ultimate  result  of  having  as  many  interpreters  of 
the  statutes  governing  banking  and  as  many  conflicting  rules  and 
regulations  for  the  guidance  of  the  banks  and  bank  examiners  as 
there  were  units  in  the  division  of  the  banks.  That  which  would 
be  held  lawful  in  one  reserve  district  would  be  ruled  to  be  unlawful 
in  another  district.  Under  the  present  system  of  supervision  there 
is  absolute  uniformity  in  the  interpretation  of  the  banking  laws 
and  the  rulings  and  regulations  of  the  Comptroller  of  the  Cur- 
rency. When  the  position  of  a  bank  or  a  bank  examiner  is  ascer- 
tained to  be  in  conflict  with  that  of  the  Comptroller's  office  it  is 
promptly  corrected  by  correspondence. 

It  is  confidently  believed,  and  this  belief  is  based  upon  the 
light  of  years  of  experience,  that  a  division  such  as  is  proposed 
in  the  supervisor}'  control  of  the  banks  would  prove  to  be  im- 
practicable and  unsatisfactory.  Enforced  observance  of  the 
law  in  some  districts  would  likely  prove  too  severe  and  arbitrary, 


ROMANCE  AND  TRAGEDY  OF  BANKING  531 

and  in  others  inexcusably  lenient  and  faulty,  unduly  lenient  or 
arbitrarily  severe  according  to  the  temperament  or  disposition  of 
the  governing  control,  influenced  by  favoritism  or  actuated  by 
selfish  interests  or  prejudices.  Many  banks  in  the  West  and  in 
the  South  have  already  experienced  some  of  the  objectionable  and 
selfish  motives  which  have  actuated  or  influenced  the  Federal  Re- 
serve Banks  in  those  sections  of  the  country  in  their  dealings  with 
member  banks  when  their  own  interests  were  concerned. 

There  is  no  advantage  whatever  to  be  gained  by  the  country 
banks  from  such  a  change  as  is  proposed  and  advocated  by  the 
Federal  Reserve  Banks,  and  no  improvement  in  the  supervisory 
system  will  result  from  such  a  change.  The  Federal  Reserve 
Banks  are  now  furnished  with  a  copy  of  the  report  of  every  exam- 
ination made  of  the  banks  in  their  respective  districts  by  the 
national  bank  examiners  immediately  upon  completion  of  the  re- 
port in  each  case,  so  that  they  have  at  all  times  as  full  and  com- 
plete knowledge  of  the  condition  of  the  banks,  as  shown  by  such 
reports,  as  the  Comptroller  of  the  Currency  has.  The  reports 
are  made  in  duplicate,  one  copy  for  the  Comptroller  of  the  Cur- 
rency, and  the  other  for  the  Federal  Reserve  Bank.  There  is  no 
duplication  of  examinations,  therefore,  and  no  necessity  for  any, 
as  the  copies  of  the  reports  furnished  the  Federal  Reserve  Banks 
by  the  national  bank  examiners  contain  all  the  information  they 
could  possibly  obtain  in  regard  to  the  condition  of  the  banks,  and 
probably  more,  if  their  own  examiners  were  to  make  the  examina- 
tions. 

State  banks  and  trust  companies  that  are  members  of  the 
Federal  Reserve  System  are,  as  a  rule,  examined  by  the  State 
Bank  examiners,  who  furnish  the  Federal  Reserve  Banks  with  a 
copy  of  their  reports  which  are  accepted  by  the  Federal  Reserve 
Banks,  unless  the  condition  shown  by  the  reports  is  not  satisfac- 
tory, in  which  case  they  have  an  examination  made  by  their  own 
examiners,  who  report  direct  to  the  Federal  Reserve  Bank  in- 
stead of  to  the  Federal  Reserve  Board,  as  national  bank  exam- 
iners do  to  the  Comptroller  of  the  Currency.  This  practice  the 
Federal  Reserve  Banks  are  exceedingly  anxious  to  have  extended  to 
national  bank  examiners  so  that  reports  of  their  examinations  of 
all  national  banks  shall  be  made  direct  to  them  instead  of  to  the 


532          ROMANCE  AND  TRAGEDY  OF  BANKING 

Comptroller  of  the  Currency,  and  that  these  examiners  shall  be 
directly  under  their  supervision  and  control. 

It  is  believed  that  it  would  be  a  serious  mistake  to  transfer  the 
supervision  and  control  of  the  national  banks  and  national  bank 
examiners  to  the  Federal  Reserve  Banks  even  though  the  Federal 
Reserve  Board  and  the  Comptroller's  office  should  be  consolidated 
at  some  time  in  the  future. 

Some  of  the  reasons  why  this  should  not  be  done  will  be  more 
clearly  understood  by  a  study  of  the  banking  and  business  situa- 
tion in  Iowa  during  the  period  commencing  about  the  year  1918, 
and  the  principal  factors  responsible  for  these  conditions. 

Iowa,  it  will  be  remembered,  is  entirely  an  agricultural  State, 
and  may  be  said  to  be,  in  fact,  one  great  big  farm.  Statistics 
show  that  about  nintey-six  per  cent,  of  the  industrial  activity  of 
the  State  arises  from  farm  products,  consisting  of  canneries,  meat 
packing  plants,  grain  mills,  etc.  The  actual  wealth  that  has 
accrued  in  Iowa  has  heretofore  come  largely  from  increases  in 
the  value  of  farm  lands  and  not  from  profits  derived  from  the 
production  of  crops.  This  fact  had  a  tendency  to  encourage 
speculation  in  land  to  an  enormous  extent.  In  many  instances 
there  were  first  and  second  mortgages  on  farm  property,  followed 
by  unsecured  notes,  nearly  all  of  which  found  their  way  into  the 
banks.  These  obligations  arose  from  inflated  values  of  the  farm 
property.  In  some  cases  the  price  was  as  high  as  $600  per  acre. 

It  was  estimated  that  the  State  and  national  banks  in  Iowa 
held  paper  of  farmers  amounting  in  the  aggregate  to  about 
$40,000,000,  given  by  them  for  the  purchase  of  highly  speculative 
stocks,  which  had  little,  if  any,  intrinsic  value.  The  promoters  of 
"sky  blue"  corporations  sold  this  stock  to  farmers,  taking  their 
notes  in  payment  therefor,  which  they  discounted  with  the  banks, 
accepting  certificates  of  deposit  for  the  proceeds.  They  then 
sold  the  certificates  to  brokers  in  Chicago  and  elsewhere  and 
when  the  certificates  matured  the  banks  naturally  were  called 
upon  to  pay  them.  In  the  meantime  the  corporations  for  whose 
shares  of  stock  the  notes  were  given  had  probably  gone  into  the 
hands  of  receivers  and  the  farmers  refused  or  contested  payment. 

These  conditions  prevailed  to  such  an  enormous  extent  that  in 
a  very  large  number  of  instances  the  loans  to  borrowers  were  of 


ROMANCE  AND  TRAGEDY  OF  BANKING  533 

such  proportions  as  to  greatly  exceed  the  legal  limit  of  the  loan- 
ing banks,  and  there  was  considerable  swapping  of  paper  between 
the  banks  for  the  purpose  of  circumventing  the  limitations  of  law. 
This  occurred  to  such  an  extent  and  in  such  magnitude  that  it 
was  not  unusual  to  find  banks  with  a  capital  of  $25,000  swap- 
ping paper  with  other  banks  of  about  the  same  size  in  amounts 
ranging  up  to  $100,000  and  in  some  cases  in  greater  amounts. 
In  a  number  of  instances  banks  sold  this  paper  to  city  corre- 
spondent banks  under  guarantees  of  their  officers  and  directors, 
which  transactions,  in  fact,  were  nothing  but  rediscounts. 

Conditions  of  this  kind  existed  in  many  banks  which  were 
difficult  for  the  examiners  to  discover  and  more  difficult  to 
correct. 

Apparently  no  curb  was  placed  upon  the  borrowing  banks  by 
the  Federal  Reserve  Bank  of  that  district  and  the  deplorable 
and  critical  situation  which  existed  in  Iowa  was,  in  a  great 
measure,  due  to  the  unreasonably  large  lines  of  credit  extended  to 
the  member  banks  by  the  Federal  Reserve  Bank  of  Chicago,  ap- 
parntly  without  regard  as  to  whether  the  funds  loaned  were  to  be 
used  in  legitimate  business  transactions  or  for  speculative  pur- 
poses or  hazardous  ventures. 

In  a  number  of  cases  the  lines  extended  to  these  banks  were 
largely  in  excess  of  justifiable  and  prudent  limits. 

In  addition  to  the  amount  of  eligible  paper  discounted  for 
Iowa  banks  by  the  Federal  Reserve  Bank  the  volume  of  ineligible 
paper  held  by  that  bank  as  collateral  to  the  eligible  paper  ran  to 
very  large  totals.  The  proper  exercise  of  even  ordinary  judgment 
by  the  Federal  Reserve  Bank  at  Chicago  in  extending  credit  to  the 
member  banks  in  Iowa  undoubtedly  would  have  prevented  the 
situation  in  that  State  from  becoming  so  acute. 

The  enormous  deflation  in  commodity  values  would  have 
caused  a  most  unsatisfactory  condition  under  the  most  favorable 
circumstances,  but  the  critical  situation  that  developed  could 
have  been  avoided,  or,  at  least,  greatly  ameliorated,  if  the  Fed- 
eral Reserve  Bank  at  Chicago  had  not  permitted  the  Iowa  banks 
to  become  so  desperately  extended. 

After  about  four  years  of  this  extreme  liberality,  the  Federal 
Reserve  Bank  suddenly  reversed  its  policy,  and  about  January 


534          ROMANCE  AND  TRAGEDY  OF  BANKING 

1,  1921,  commenced  to  advise  the  banks  that  they  could  have  no 
more  credit,  but  must  arrange  to  liquidate  their  indebtedness.  An 
active  and  vigorous  campaign  was  then  inaugurated  through  the 
Federal  Reserve  examiners  to  coerce  the  banks  into  liquidating 
their  obligations  to  the  Federal  Reserve  Bank. 

Due  to  the  shrinkage  in  the  value  of  farm  products  the  tenants 
were  unable  to  pay  the  landlords  the  cash  rents  contracted  for  on 
the  basis  of  high  values.  Consequently  nearly  all  business  in  that 
State  was  at  a  standstill.  Practically  nothing  was  being  moved 
to  the  markets.  A  considerable  portion  of  the  previous  year's 
corn  crop  remained  to  be  moved,  but  this  could  not  be  done  until 
the  roads  were  in  a  better  condition.  Most  of  the  hogs  were  not 
ready  for  market.  It  was  no  time  for  liquidation  at  the  then 
market  prices. 

For  the  Federal  Reserve  Bank  to  insist  that  any  great  pro- 
portion of  the  borrowings  of  the  banks  be  liquidated  at  that  time 
was  a  thing  impossible  to  be  accomplished.  The  result  of  such 
a  policy  on  the  part  of  the  Federal  Reserve  Bank  was  obvious. 

Numerous  complaints  from  different  banks  and  from  other 
sources  were  made  to  the  Comptroller  of  the  Currency  of  the 
attitude  of  the  Federal  Reserve  Bank  and  the  Federal  Reserve 
examiners,  which  were  brought  to  the  attention  of  the  Federal 
Reserve  Board  by  the  Comptroller.  The  Governor  of  the  bank 
and  some  of  its  officers  were  summoned  to  Washington  for  a  con- 
ference over  the  situation,  with  the  result  that  a  change  of  policy 
was  immediately  put  into  effect  and  the  injudicious  and  destruc- 
tive methods  that  had  been  pursued  were  abandoned,  and  more 
constructive  measures  adopted  in  the  nature  of  assisting  the  banks 
that  were  deserving  of  assistance.  The  Comptroller  of  the  Cur- 
rency transferred  a  number  of  his  most  experienced  examiners 
into  the  State  to  study  the  situation  and  aid  the  banks  in  every 
possible  and  proper  way  and  encourage  them  to  remain  open  by 
having  them  understand  that  they  were  there  to  help  them  out 
of  their  difficulties  and  not  to  force  them  into  liquidation.  This 
constructive  policy  was  also  pursued  by  the  Federal  Reserve  Bank 
after  the  conference  in  Washington,  and  thus  what  threatened  to 
develop  from  a  bad  to  a  very  serious  banking  situation  was  great- 
ly alleviated. 


ROMANCE  AND  TRAGEDY  OF  BANKING  535 

What  has  been  said  in  regard  to  the  conditions  in  Iowa  and 
the  policies  of  the  Federal  Reserve  Bank  and  its  examiners  may 
also  be  said  of  other  Federal  Reserve  districts  where  similar  con- 
ditions existed  and  like  methods  were  resorted  to. 

In  some  cases  banks  were  forced  to  suspend  business  and  close 
their  doors,  either  by  the  voluntary  action  of  the  board  of  di- 
rectors, because  of  their  inability  to  meet  the  exactions  of  the 
Federal  Reserve  examiners,  or  by  the  examiner's  direction,  an 
assumption  of  authority  which  he  did  not  possess.  In  a  number 
of  cases  banks  were  urged  to  the  point  of  insistency  to  dispose  of 
their  Liberty  Bond  holdings  at  a  considerable  loss,  for  which 
they  had  paid  par  at  the  time  of  their  issue,  when  each  Federal 
Reserve  Bank  was  alloted  by  the  Government  a  certain  amount  of 
the  total  issue  and  each  member  bank  was  urgently  solicited  to 
take  its  proportionate  share  of  such  allotment. 

It  was  alleged  by  the  president  and  cashier  of  a  national  bank 
in  Montana  that  the  bank  was  closed  by  the  Helena  branch  of  the 
Minneapolis  Federal  Reserve  Bank  for  political  reasons,  and  that 
the  Helena  branch  withheld  from  the  bank  further  rediscount 
privileges  at  a  critical  time  in  order  to  force  the  bank  into  insol- 
vency. They  charged  that  this  was  due  to  the  influence  of  the 
chairman  of  the  board  of  the  Helena  branch  bank,  who  owned  a 
controlling  interest  in  a  Montana  State  bank,  a  competing  bank 
of  the  national  association  which  was  closed. 

It  was  asserted  further  that  without  authority  or  approval 
the  examiner  of  the  Helena  branch  called  at  the  national  bank  on 
July  26,  1921,  and  under  threats  and  duress  compelled  the  cashier 
of  the  bank  to  accept  a  receipt  for  certain  notes  that  he  took  from 
the  bank's  portfolio,  as  excess  collateral  amounting  to  $17,472.45. 
The  cashier  further  asserted  that  this  paper  was  the  very  best 
security  in  the  bank  for  rediscount  purposes  and  without  it  the 
bank  was  left  in  a  very  precarious  financial  condition.  He  attrib- 
uted the  failure  of  the  bank  to  the  loss  of  this  paper,  and  stated 
that  after  complaining  to  the  Helena  branch  of  the  action  of  the 
examiner  and  making  several  demands  for  the  return  of  this 
paper,  some  of  it  was  returned  to  the  bank  on  October  5. 

It  was  stated  that  the  cashier  of  this  bank  was  a  young  man 
of  but  limited  experience  and  was  easily  swayed  by  the  predom- 


536 

inating  influence  of  the  Federal  Reserve  examiner,  and  after  mak- 
ing futile  efforts  to  secure  help  elsewhere  than  from  the  Federal 
Reserve  branch  and  without  the  backing  of  the  directors  of  his 
bank,  he  telephoned  the  manager  of  the  Helena  branch  that  he 
was  through  and  would  close  the  bank  and  post  a  notice  on  the 
window  that  it  was  closed. 

He  stated  further  that  after  closing  the  bank  and  before  the 
arrival  of  the  national  bank  examiner  to  take  charge,  the  manager 
of  the  Helena  branch  of  the  Federal  Reserve  Bank  telephoned 
him  a  request  to  send  to  the  Helena  branch  certain  notes  held  by 
the  bank  in  trust  for  the  reserve  bank,  which,  he  stated,  he  re- 
fused to  do  as  he  had  no  right  to  dispose  of  any  of  the  property  or 
assets  of  the  closed  bank  prior  to  the  arrival  of  the  national  bank 
examiner. 

Another  occurrence  was  reported  to  the  Comptroller's  office 
of  a  small  State  member  bank  in  the  eleventh  Federal  Reserve  dis- 
trict, which  had  been  hard  pressed  for  funds  and  was  badly  in 
need  of  assistance  owing  to  the  business  depression  in  that  section 
of  the  country. 

It  was  stated  that  a  representative  of  the  Federal  Reserve 
Bank  called  at  this  bank  and  demanded  of  the  cashier  that  he 
turn  over  to  him  all  the  available  cash  the  bank  then  had  on  hand, 
to  protect  the  Federal  Reserve  Bank  from  loss  on  advances  that 
had  been  made  to  the  bank,  and  that,  after  making  a  futile  pro- 
test, he  complied  with  this  demand  and  the  representative  of  the 
Federal  Reserve  Bank  took  away  with  him  every  dollar  of  cash 
the  bank  had,  even  to  the  nickels  and  cents,  so  that  there  was 
nothing  else  for  the  cashier  to  do  but  to  suspend  business  and 
close  the  doors  of  the  bank. 

It  is  not  believed  by  anyone  familiar  with  the  operations  of  the 
office  of  the  Comptroller  of  the  Currency  that  the  affairs  of  that 
bureau  can  be  satisfactorily,  promptly  and  efficiently  adminis- 
tered by  a  board  requiring  unanimity  of  its  members  as  it  has 
been  or  can  be  by  a  single  responsible  head  with  authority  to  act 
upon  his  own  responsibility.  Many  of  the  affairs  of  the  bureau 
require  such  prompt  decision  and  quick  action  during  the  busi- 
ness hours  of  the  day  and  after  business  hours  as  would  be  impos- 
sible to  obtain  from  a  board.  Instructions  to  bank  examiners  and 


ROMANCE  AND  TRAGEDY  OF  BANKING  537 

receivers  of  failed  banks  as  to  critical  banking  situations  and  im- 
portant business  transactions  are  frequently  required  to  be  given 
by  telegraph  or  telephone  during  all  hours  of  the  day  and  night. 

With  very  few  exceptions  the  supervision  of  State  banks  is 
conferred  by  law  upon  one  official,  and  even  in  States  where  super- 
vision is  conferred  upon  boards  there  appears  to  be  the  delega- 
tion of  executive  power  to  a  single  head.  Within  the  past  few 
years  California  and  Connecticut  changed  their  laws  to  provide 
for  a  Superintendent  or  Commissioner  of  Banking  in  lieu  of  a 
board.  In  the  State  of  Nevada  the  banking  board  is  composed 
of  the  Governor  and  a  State  bank  examiner,  but  the  duties  of  the 
board  appear  to  be  conferred  upon  the  examiner,  who  is  practi- 
cally the  single  executive  head  of  the  board. 

As  independent  bureaus  the  duties  of  the  Federal  Reserve  Board 
and  those  of  the  Comptroller  of  the  Currency  are  distinctly  sep- 
arate and  well  defined.  To  unite  the  bureaus  would  create  con- 
fusion and  to  a  certain  degree  inefficiency.  It  would  also  be  neces- 
sary to  amend  the  national  banking  laws  in  many  respects  to  avoid 
complications,  as  the  simple  transfer  of  the  powers  and  duties  of 
the  Comptroller  to  the  Federal  Reserve  Board  would  not  be  ample 
to  cover  the  situations  which  would  ensue. 

The  national  banks  are  now  under  the  supervision  of  the 
Comptroller  of  the  Currency,  who  is  a  member  of  the  Federal 
Reserve  Board.  He  participates  in  the  deliberations  of  that  body 
and  has  a  voice  in  their  conclusions.  The  proposed  change  would 
not  in  any  way  alter  results.  If  the  two  bureaus  were  merged  it 
would  be  necessary  for  the  board  to  designate  some  one  of  its 
members  as  the  executive  head  of  what  is  now  the  Comptroller's 
office,  with  full  power  to  act  upon  his  own  responsibility  in  regard 
to  all  matters  which  could  not  be  delayed  for  board  action.  This 
would  be  practically  the  same  condition  as  exists  at  the  present 
time.  The  Comptroller  is  the  executive  head  of  the  bureau  and  is 
a  member  of  the  board.  The  only  effect  of  the  proposed  change, 
therefore,  would  be  to  delay  action  on  all  matters  which  required 
consideration  by  the  full  board. 

While  it  would  be  difficult  for  the  board  to  act  promptly  as  a 
whole  on  all  matters,  it  is  very  questionable  whether  they  would 
have  the  power  to  delegate  to  one  of  their  members  full  authority 


538          ROMANCE  AND  TRAGEDY  OF  BANKING 

over  the  bureau  with  power  to  act  on  such  questions  as  the  issu- 
ance and  extension  of  charters,  appointment  of  receivers  of  insol- 
vent banks  and  liquidation  of  their  affairs.  If  the  board  should 
have  authority  to  designate  one  of  its  members  to  act  with  full 
power  in  all  such  matters  there  would  be  practically  no  difference 
between  the  officer  so  designated  and  the  present  Comptroller.  If 
he  were  not  so  designated  and  empowered  it  would  be  impossible 
on  all  occasions  to  give  the  prompt  action  that  is  necessary  when 
a  bank  is  in  a  critical  condition.  On  numerous  occasions  the 
Deputy  Comptroller,  when  Acting  Comptroller,  has  had  to  give 
directions  by  telephone  in  the  middle  of  the  night  to  national  bank 
examiners  or  answer  inquiries  in  like  manner  in  regard  to  matters 
that  were  necessary  to  determine  before  the  opening  of  the  bank 
for  business  on  the  following  morning. 

There  is  another  phase  of  this  question  which  calls  for  very 
careful  consideration  and  is,  without  doubt,  the  most  important, 
from  the  standpoint  of  the  depositors'  interests  in  the  banks,  of 
any  of  the  objections  that  can  be  raised  to  the  amalgamation  of 
the  office  of  the  Comptroller  of  the  Currency  with  the  Federal 
Reserve  Board. 

The  United  States  Government,  as  is  well  known,  does  not  in 
any  sense  guarantee  the  deposits  in  national  banks,  or  assume  any 
liability  for  their  payment,  but  the  Comptroller  of  the  Currency 
always  has  been  regarded  by  depositors  as  the  special  guardian, 
as  it  were,  of  their  interests.  They  always  have  relied  on  him  for 
the  protection  which  he  has  endeavored  to  insure  to  the  fullest 
extent  of  his  power  by  requiring  the  banks  to  observe  the  law  and 
conduct  their  business  not  only  within  legal  limitations  but  also 
within  the  bounds  of  prudence  and  safety.  It  is  the  prime  duty  of 
the  Comptroller,  and  always  has  been,  to  know,  through  the  in- 
strumentality of  his  examiners,  that  a  bank  is  at  all  times  in  a 
solvent  condition,  that  the  liquidating  value  of  its  assets  is,  at 
least,  equal  to  its  liabilities  to  depositors  and  other  creditors,  and 
that  it  can  arrange  to  pay  them  promptly  on  demand.  To  this 
end  all  banks  are  examined  twice  each  year  and  many  of  them 
more  frequently  as  their  condition  seems  to  require.  If  the  exam- 
iner's report  discloses  that  a  bank  is  in  an  unsatisfactory  condi- 


ROMANCE  AND  TRAGEDY  OF  BANKING  539 

tion  proper  corrective  measures  are  promptly  adopted,  always 
with  a  view  to  protecting  the  interests  of  the  depositors. 

Of  course,  it  has  been  beyond  the  power  of  the  Comptroller  to 
prevent  a  bank  failure  in  every  instance,  but  as  has  been  herein- 
before stated  for  every  failure  that  has  occurred  many  failures 
have  been  prevented  through  the  timely  and  effective  supervision 
of  the  Comptroller,  and  where  failures  have  occurred  the  first 
duty  of  the  Comptroller  has  been  to  take  prompt  steps  to  protect 
the  interests  of  the  depositors  by  at  once  placing  the  bank  tempo- 
rarily in  the  hands  of  an  examiner  until  it  could  be  determined 
whether  reorganization  and  resumption  of  business  could  be 
effected  or  whether  it  would  be  necessary  to  finally  liquidate  the 
bank's  affairs  through  a  receivership.  In  the  liquidation  of  a 
bank  through  a  receivership  the  interests  of  the  depositors  take 
precedence  over  every  other  claim  except  that  of  the  Government 
for  the  redemption  of  circulation,  if  there  should  be  any  circula- 
tion outstanding,  and  this  liability  is  always  satisfied  by  a  sale  of 
the  Government  bonds  held  by  the  United  States  Treasurer  as 
security  therefor.  If  the  assets  of  the  bank  are  insufficient  to  pay 
the  liabilities  to  the  depositors  in  full,  then  the  stockholders  be- 
come liable  to  the  extent  of  one  hundred  per  cent,  of  their  stock 
holdings  for  the  amount  of  the  deficiency,  and  the  receiver  pro- 
ceeds, under  authority  of  the  Comptroller,  to  enforce  payment  of 
the  assessment. 

As  the  assets  of  the  bank  are  reduced  to  cash  dividends  are 
declared  from  time  to  time  and  the  proceeds  distributed  pro  rata 
to  the  depositors.  No  money  or  assets  are  returned  to  the  stock- 
holders until  the  claims  of  depositors  are  paid  in  full  with  inter- 
est from  the  date  of  closing  of  the  bank  if  the  assets  should  yield 
a  sufficient  amount  for  such  payment. 

It  follows,  therefore,  that  the  interests  of  depositors  in  na- 
tional banks  are  protected  to  the  fullest  extent  possible  by  the 
Comptroller  of  the  Currency  from  the  moment  a  bank  opens  its 
doors  for  business  until  it  is  finally  liquidated  through  a  receiver- 
ship, should  the  bank  be  so  unfortunate  as  to  be  placed  in  the 
hands  of  a  receiver. 

The  Comptroller  or  the  receiver  has  no  personal  or  selfish 
interests  in  the  outcome  of  the  liquidation  to  satisfy  or  to  gratify. 


540  ROMANCE  AND  TRAGEDY  OF  BANKING 

His  only  concern  in  the  liquidation  of  a  failed  bank  is  to  endeavor 
to  obtain  every  dollar  that  it  is  possible  to  realize  from  the  assets 
of  the  bank  by  collection,  compromise  or  sale  and  to  make  a  fair, 
impartial  and  pro  rata  distribution  of  the  proceeds  to  the  depos- 
itors in  the  failed  institution. 

It  is  now  proposed  to  change  all  this  by  merging  the  Comp- 
troller's office  with  the  Federal  Reserve  Board  and  transferring 
the  supervision  of  the  banks  and  bank  examiners  to  the  Federal 
Reserve  Banks. 

The  relationship  between  the  Federal  Reserve  Banks  and  the 
depositors  in  national  banks  is  quite  different  from  that  of  the 
Comptroller  of  the  Currency  towards  these  institutions.  The 
Comptroller  is  entirely  independent  of  these  banks  and  free  from 
any  personal  interest  in  their  affairs.  The  Federal  Reserve  Banks 
are  generally  interested  as  a  creditor  and  invariably  so  in  the 
banks  that  are  in  an  over-extended  and  otherwise  unsatisfactory 
condition,  or  verging  on  insolvency.  Therefore,  when  one  of  these 
banks  becomes  insolvent  the  Federal  Reserve  Bank  is  usually  its 
largest  creditor,  and  a  preferred  creditor  at  that,  as  it  always 
holds  as  security  for  rediscounts  or  for  loans  made  the  institution 
its  choicest  paper.  Self-preservation  is  the  first  law  of  nature. 
The  first  move  of  the  Federal  Reserve  Bank  after  failure  of  the 
debtor  bank,  therefore,  would  be  to  take  care  of  its  own  interests. 
The  doors  of  the  failed  institution  would  be  closed  and  its  affairs 
would  have  passed  into  the  hands  of  a  preferred  creditor — the 
Federal  Reserve  Bank — which  would  immediately  proceed  to  sat- 
isfy its  own  claims,  even  to  the  extent  of  sacrificing  the  security 
which  it  holds,  if  necessary,  regardless  of  the  interests  of  the 
helpless  and  unfortunate  depositors. 

Would  it  be  reasonable,  therefore,  to  assume  that  it  would  do 
otherwise  or  have  the  same  solicitude  for  the  welfare  of  the  gen- 
eral depositor  that  the  Comptroller  of  the  Currency  would  have? 
The  first  duty  of  the  Federal  Reserve  Bank  would  naturally  be  to 
itself.  That  bank  would  have  no  concern  for  the  general  depos- 
itor until  after  its  own  claim  upon  the  insolvent  institution  should 
have  been  fully  satisfied. 

What  would  have  been  the  effect  upon  the  interests  of  depos- 
itors if  a  national  bank  had  failed  under  such  conditions  as  those 


ROMANCE  AND  TRAGEDY  OF  BANKING  541 

described  as  having  prevailed  in  Iowa,  Montana,  Texas  and  in 
other  sections  of  the  country,  and  the  bank  had  been  liquidated 
under  the  supervision  of  the  Federal  Reserve  Bank?  What 
would  have  remained  for  the  depositors  after  the  Federal  Reserve 
Bank,  in  satisfying  its  claim,  had  disposed  of  not  only  the  eligible 
paper  which  it  held  as  security,  but  as  much,  if  not  all,  of  the  in- 
eligible paper  and  securities  which  it  also  held  as  collateral  to 
the  eligible  paper?  It  is  not  difficult  to  imagine. 

A  preferred  creditor  of  an  insolvent  national  bank,  holding 
security  for  his  claim,  is  entitled  to  prove  the  claim  against  the 
bank  for  the  full  amount  of  the  debt  and,  at  the  same  time,  to 
receive  thereon  any  dividends  that  may  be  declared  until  the 
amount  of  the  dividends  and  the  collections  from  the  collateral 
held  are  sufficient  to  discharge  the  debt  in  full. 

There  is  no  question  in  connection  with  the  liquidation  of  in- 
solvent banks  that  arises  more  frequently  and  is  contested  more 
warmly  than  that  of  preferential  claims  of  creditors.  There  is 
no  general  or  definite  rule  for  determining  the  right  of  a  creditor 
to  a  preference.  The  question  always  has  been  determined  in 
each  case  by  the  Comptroller  of  the  Currency  himself,  upon  a  full 
and  clear  statement  of  the  facts  submitted  to  him  by  the  receiver 
or  by  the  courts  on  appeal.  Comptrollers  have  been  so  careful  to 
prevent  favoritism  of  any  kind  in  allowing  preferences  that  even 
the  receivers  of  insolvent  banks  never  have  been  permitted  to 
decide  these  questions  upon  their  own  judgment. 

The  procedure  of  placing  a  preferred  creditor  in  charge  of 
an  insolvent  national  bank  who  holds  as  security  for  his  loan 
the  very  best  paper  of  the  bank,  or  any  creditor  or  debtor  of  the 
institution,  for  that  matter,  is  without  precedent  in  the  history  of 
the  office  of  the  Comptroller  of  the  Currency. 

The  liquidation  of  an  insolvent  bank  should  be  under  the  im- 
mediate supervision  of  a  wholly  disinterested  Government  official, 
such  as  the  Comptroller  of  the  Currency.  Neither  the  Federal 
Reserve  Bank  nor  the  Federal  Reserve  Board  should  have  any 
voice  in  the  settlement  of  the  affairs  of  such  banks. 

The  national  banking  system  has  been  in  operation  for  nearly 
fifty-nine  years.  Its  principal  defects  and  weaknesses,  which 
existed  and  were  fully  recognized  for  so  long  a  time,  were  prac- 


542          ROMANCE  AND  TRAGEDY  OP  BANKING 

tically  cured  by  the  enactment  of  the  Federal  Reserve  Act,  which 
materially  enlarged  the  scope  of  powers  of  the  banks,  and  afforded 
them  the  means  of  obtaining  additional  credits  to  meet  the  needs 
of  their  respective  communities.  Under  the  leadership  of  the 
Comptroller  of  the  Currency  the  national  banking  system  has 
successfully  stood  the  tests  of  time  and  safely  weathered  the  finan- 
cial storms  and  business  depressions  of  every  character  and  sever- 
ity which  it  has  encountered  during  the  more  than  half  century 
of  its  existence. 

The  experience  of  the  past  is  always  a  safe  guide  in  determin- 
ing the  course  of  the  future.  The  best  interests  of  the  national 
banking  system  and  of  the  banks  would  not  be  benefited  by  such 
a  convulsive  and  experimental  change  as  the  abolition  of  the  office 
of  the  Comptroller  of  the  Currency  and  the  transfer  of  the  Comp- 
troller's duties  to  the  Federal  Reserve  Board  or  to  the  Federal 
Reserve  Banks,  as  is  proposed.  The  duties  of  the  Comptroller 
and  the  business  of  the  Comptroller's  office  can  be  more  efficiently, 
economically  and  advantageously  administered  separately  than 
by  uniting  the  two  bureaus,  and  more  satisfactory  results  will 
accrue  to  the  banks  and  the  banking  public  by  their  continued 
operation  apart,  as  they  have  been. 

The  stability  and  continued  success  of  the  national  banking 
system  depends  wholly  upon  the  confidence  of  the  depositors  in 
the  security  of  their  deposits  and  an  impartial  and  conservative 
execution  of  the  banking  laws.  Any  change  that  will  have  a  ten- 
dency to  jeopardize  the  safety  of  deposits  or  impair  confidence 
in  the  supervisory  authority  will  have  an  injurious  effect  upon 
the  system  as  a  whole. 

Any  supervisory  authority  which  the  Federal  Reserve  Board 
may  possess  should  be  limited  to  the  regulation  of  the  Federal 
Reserve  Banks  and  the  restriction  of  the  activities  of  these  banks 
to  the  discharge  of  the  duties  for  which  they  were  expressly  cre- 
ated, namely :  to  supply  the  member  banks  in  times  of  urgent  need 
with  funds,  by  means  of  rediscounting  their  eligible  paper  in 
amounts  sufficient  to  enable  them  to  meet  the  demands  of  creditors 
and  of  legitimate  business  in  their  respective  communities. 

Closer  supervision  of  the  Federal  Reserve  Banks  by  the  Fed- 
eral Reserve  Board  and  more  uniformity  of  regulations  in  regard 


ROMANCE  AND  TRAGEDY  OF  BANKING  543 

to  the  management  and  methods  of  these  banks  would  appear  to 
be  very  necessary  in  the  light  of  developments  and  disclosures 
hereinbefore  referred  to.  The  frequent  encroachments  of  some 
of  the  Federal  Reserve  Banks  upon  the  jurisdiction  of  the  Comp- 
troller of  the  Currency  and  their  unauthorized  and  unwarranted 
interference  with  the  Comptroller's  functions  have  been  produc- 
tive of  more  or  less  confusion  of  understanding  and  conflict  of 
instructions,  difficult  to  reconcile  or  correct.  This  has  been  nota- 
bly the  case  in  connection  with  matters  involving  the  interpreta- 
tion of  provisions  of  the  banking  laws  by  giving  information  or 
advice  in  conflict  with  the  rules  of  practice  established  and  fol- 
lowed by  the  Comptroller's  office.  Instead  of  referring  the  banks, 
as  they  should  have  done,  to  the  Comptroller  of  the  Currency  for 
information  or  instructions  on  all  such  subjects,  some  of  the 
Federal  Reserve  Banks  in  numerous  instances  have  undertaken  to 
interpret  the  law,  instruct  the  banks,  or  answer  the  inquiries  ac- 
cording to  the  judgment  of  the  particular  individual  to  whom  the 
inquiries  were  submitted,  and  almost  invariably  the  instructions 
or  information  given  was  in  conflict  with  the  position  of  the  Comp- 
troller's office  on  the  same  subject  and  with  that  of  the  national 
bank  examiners. 

To  avoid  conflicts  of  this  nature,  therefore,  and  resulting  con- 
fusion the  Federal  Reserve  Board  should  assume  active  super- 
vision of  the  Federal  Reserve  Banks,  restrict  the  activities  of  these 
banks  to  the  discharge  of  the  duties  for  which  they  were  created, 
as  hereinbefore  explained,  and  leave  the  supervision  of  the  na- 
tional banks  exclusively  to  the  Comptroller  of  the  Currency.  The 
duties  and  powers  of  each  branch  of  the  system  are  well  defined 
by  law,  and  if  each  branch  will  attend  strictly  to  its  own  business 
and  not  encroach  upon  or  interfere  with  the  duties  of  the  other 
there  is  no  good  reason  why  the  three  branches  of  the  Federal  Re- 
serve System  should  not  function  harmoniously,  effectively  and 
successfully,  and  the  system,  as  a  whole,  be  a  worthy  successor, 
as  it  was  intended  it  should  be,  of  the  national  banking  system. 
Unless  this  is  done,  more  or  less  confusion,  conflict  and  dissatis- 
faction will  be  the  inevitable  consequence. 

The  knowledge  that  the  system  as  a  whole  is  working  harmo- 
niously, that  the  principal  imperfections  of  the  national  banking 


544          ROMANCE  AND  TRAGEDY  OF  BANKING 

laws  have  been  corrected  or  removed  and  its  deficiencies  supplied 
should,  and  no  doubt,  will,  so  increase  public  confidence  in  the 
stability  and  safety  of  the  improved  system,  as  a  whole,  as  to 
insure  its  satisfactory  and  successful  perpetuity  through  the 
years  to  come. 

Status  of  the  Federal  Reserve  Board 

The  Federal  Reserve  Board  is  not  a  bureau  of  the  Treasury 
Department  like  the  office  of  the  Comptroller  of  the  Currency. 
It  is  a  part  of  the  banking  system  of  the  country  and  not  of  the 
Government.  If  it  were  a  bureau  of  the  Treasury  Department 
the  Government  then  would  be  in  the  banking  business.  It  is  not 
the  function  of  Government  to  engage  in  such  business,  and,  there- 
fore, inasmuch  as  the  board  is  not  a  Government  bureau  it  should 
be  located  in  a  building  of  its  own  outside  of  the  Treasury  Depart- 
ment. 

The  principal  functions  of  the  Federal  Reserve  Board  were 
intended  to  be  to  provide,  through  the  Federal  Reserve  Banks,  a 
circulating  medium  sufficiently  elastic  to  meet  readily  the  periodi- 
cal demands  for  additional  currency  incident  to  the  movement  of 
the  crops  and  increased  industrial  and  commercial  activities  by 
making  it  possible  for  the  banks  to  convert  quickly  their  assets 
into  cash  to  meet  unexpected  contingencies  or  extraordinary  de- 
mands upon  them,  and  to  automatically  retire  such  currency 
when  no  longer  neded. 

The  principal  defect  in  the  national  bank  currency  was  its  in- 
elasticity. It  was  unresponsive  to  the  demands  of  trade  and  com- 
merce, and  the  Comptroller  of  the  Currency  was  powerless  to 
make  it  otherwise. 

In  addition  to  providing  an  elastic  currency,  the  duty  was  im- 
posed upon  the  Federal  Reserve  Board  of  prescribing  regulations 
for  the  Federal  Reserve  Banks,  governing  the  rates  of  discount, 
and,  incidentally,  to  conserve  the  country's  stock  of  gold  as  a 
material  basis  for  Federal  Reserve  issues  of  currency. 

The  Federal  Reserve  Board  is  the  head  of  the  Federal  Reserve 
Banking  System.  The  members  of  the  board,  with  the  exception 
of  the  Secretary  of  the  Treasury  and  the  Comptroller  of  the 


ROMANCE  AND  TRAGEDY  OF  BANKING  545 

Currency,  who  are  ex-officio  members,  are  not  officers  of  the  Gov- 
ernment, like  the  heads  of  bureaus,  although  appointed  by  the 
President  and  confirmed  by  the  United  States  Senate.  They  are 
a  part  of  the  Federal  Reserve  Banking  System. 

The  Comptroller  of  the  Currency  is  an  official  of  the  United 
States  Government.  He  is  the  representative  of  the  Government 
and  not  of  the  banks.  He  is  charged  with  the  duty  of  administer- 
ing the  banking  laws  and  the  supervision  of  the  banks.  He  repre- 
sents no  part  of  the  banking  system  and  his  relations  with  the 
banks  are  entirely  independent  and  disinterested,  except  so  far  as 
seeing  that  the  laws  are  faithfully  administered  and  properly  ob- 
served by  the  banks  in  the  conduct  of  their  business.  To  abolish 
the  office  of  Comptroller  would  remove  the  only  safety  link  be- 
tween the  Government  and  the  depositors  upon  which  the  latter 
have  relied  confidently  for  more  than  a  half  century,  as  to  the 
solvency  of  the  banks  and  the  security  of  their  deposits.  And  the 
banks  have  exploited  the  Comptroller's  supervision  by  advertise- 
ment and  otherwise,  as  their  strongest  recommendation  for  the 
confidence  of  the  banking  community  in  soliciting  and  retaining 
their  business.  The  right  to  advertise  the  institution  as  being 
under  the  supervision  of  the  Government  of  the  United  States 
always  has  been  regarded  bv  national  banks  as  one  of  their  most 
valuable  assets,  and  this  fact  has  been  prominently  displayed  and 
extensively  advertised  from  the  day  the  banks  first  opened  their 
doors  for  business  in  competition  with  other  banking  institutions 
in  their  respective  communities. 

Supervision  of  the  member  banks  by  the  Federal  Reserve 
Banks  would  be  equivalent  to  supervision  by  the  system  of  which 
the  member  banks  are  a  part,  and  not  by  an  independent,  impar- 
tial and  disinterested  officer  of  the  United  States  Government, 
like  the  Comptroller  of  the  Currency.  The  officers  in  charge  of 
the  Federal  Reserve  Banks  would  not  have  the  same  solicitude  for 
the  interests  of  the  depositors  that  the  Comptroller  has.  Nor 
would  the  depositors  have  the  same  degree  of  confidence  in  this 
character  of  supervision  as  they  have  in  supervision  by  an  im- 
partial and  wholly  disinterested  official  of  the  United  States  Gov- 
ernment, especially  in  the  liquidation  of  banks  in  which  the  super- 
vising authorities  would  have  a  substantial  and  secured  interest. 


546          ROMANCE  AND  TRAGEDY  OF  BANKING 

which  they  would  proceed  to  satisfy  first,  as  has  been  done  in 
every  instance  of  a  suspended  bank  owing  the  Federal  Reserve 
Bank  money. 

The  Federal  Reserve  Act  was  a  most  excellent  piece  of  con- 
structive banking  legislation,  and  it  was  enacted  at  a  very  oppor- 
tune time,  although  it  did  not  begin  to  function  until  November 
16,  1914,  over  four  and  a  half  months  after  the  outbreak  of  the 
great  World  War.  Fortunately,  however,  it  contained  the  pro- 
vision extending  the  life  of  the  Aldrich-Vreeland  emergency  cur- 
rency act  for  the  period  of  one  year.  This  enabled  the  Comp- 
troller of  the  Currency,  under  authority  of  the  Secretary  of  the 
Treasury,  to  make  use  immediately  of  the  several  hundred  mil- 
lions of  emergency  currency  which  had  been  accumulated  in  the 
vaults  of  the  Treasury  Department  for  just  such  a  contingency. 

The  prompt  issue  of  this  circulation  to  currency  associations 
that  had  been  hastily  formed  under  authority  of  the  Aldrich- 
Vreeland  Act  supplied  the  banks  in  all  parts  of  the  country  with 
all  the  money  they  required  and  enabled  them  to  continue  cur- 
rency payments  without  interruption,  thus  relieving  a  very  men- 
acing situation  and  inspiring  confidence  in  the  soundness  of  busi- 
ness and  of  our  financial  institutions  and  averted  a  threatened 
panic  such  as  the  country  never  had  experienced. 

Notwithstanding  all  that  may  be  said  in  favor  of  the  Federal 
Reserve  Act,  it  was  not  and  is  not  a  perfect  banking  measure.  It 
had  and  still  contains  many  imperfections.  Fundamentally  it  is 
sound,  but  many  of  its  provisions  can  be  improved  upon,  some  by 
legislative  amendments  and  others  by  judicious  administration 
more  in  harmony  with  the  spirit  and  intent  of  the  act  than  has 
been  displayed  in  many  instances.  Some  of  its  provisions  should 
be  entirely  repealed  and  some  of  its  weak  features  strengthened 
and  safeguarded  so  as  to  prevent  extravagances,  wastefulness  in 
expenditures  and  oppressive  abuses  through  the  enforcement  of 
policies  of  administration  not  contemplated  by  the  act,  but  arbi- 
trarily assumed  and  exercised  by  administrative  officers  of  the 
Federal  Reserve  Banks. 

Politics,  the  arbitrary  exercise  of  power  and  the  improper  and 
extravagant  use  of  money  were  some  of  the  principal  charges 
made  against  the  United  States  Bank  which  finally  led  to  its 


ROMANCE  AND  TRAGEDY  OF  BANKING  547 

downfall.     The  Federal  Reserve  Banks  should  profit  by  the  his- 
tory of  that  institution. 

If  misfortune  or  failure  ever  overtakes  the  Federal  Reserve 
System,  it  will  arise  through  opposition  to  objectionable  and  op- 
pressive policies  and  methods  of  administration  of  the  Federal 
Reserve  Banks  as  affecting  disastrously  the  interests  and  business 
of  the  member  banks.  Therefore,  it  would  be  an  exceedingly  dan- 
gerous experiment  to  abolish  the  office  of  Comptroller  of  the' 
Currency  and  to  transfer  to  the  Federal  Reserve  Banks  the 
power  to  examine  and  supervise  the  member  banks,  as  time  would 
very  soon  prove,  if  this  fact  has  not  been  sufficiently  demonstrated 
already  by  the  experiences  which  a  number  of  the  member  banks 
have  had  in  the  sections  covered  by  the  incidents  heretofore 
related. 

It  will  be  noted  that  throughout  this  entire  volume  the  pronoun 
"I"  has  not  been  used  in  a  single  instance,  except  on  the  intro- 
ductory pages,  when  it  could  not  well  be  avoided. 

I  hope  I  may  be  excused,  therefore,  if  in  these  concluding 
paragraphs  I  make  some  allusions  to  myself  in  the  first  person. 

It  may  be  the  impression  of  some  of  the  readers  of  this  volume 
that  my  views  in  regard  to  the  inadvisability  of  transferring  to 
the  Federal  Reserve  Board  and  the  Federal  Reserve  Banks  any  of 
the  supervisory  powers  heretofore  exercised  by  the  Comptroller  of 
the  Currency  are  influenced  by  personal  or  selfish  interests  as 
affecting  the  position  which  I  have  continuously  occupied  for 
more  than  twenty-three  years. 

To  remove  any  thought  of  this  nature  from  the  mind  of  any- 
one who  might  entertain  such  an  impression,  it  may  be  stated 
that  the  position  of  Deputy  Comptroller  of  the  Currency  is  a 
classified  civil  service  place  and  the  occupant  is  subject  to  the 
provisions  of  the  retirement  act.  I  passed  the  maximum  retire- 
ment age  some  time  ago  and  am  now  holding  the  position  under  a 
second  extension  of  time  for  the  limited  period  of  two  years.  I 
was  willing  and  anxious  to  retire  from  office  at  the  end  of  the 
first  period  of  extension,  but  I  concluded  to  remain  for  a  while 
longer  at  the  urgent  request  of  Comptroller  Crissinger,  in  the 


548  ROMANCE  AND  TRAGEDY  OF  BANKING 

following  letter  addressed  by  him  to  the  Secretary  of  the  Treas- 
ury under  date  of  May  27,  1922: 

The  purpose  of  this  letter  is  to  advise  you  that  this 
office  has  requested  the  retention  in  the  service  for  a  period 
of  two  years  from  August  20,  1922,  of  Mr.  Thomas  P. 
Kane,  Deputy  Comptroller  of  the  Currency. 

Mr.  Kane  is  one  of  the  most  indispensable  men  con- 
nected with  the  Bureau  of  the  Comptroller  of  the  Cur- 
rency. He  is  willing  to  continue  in  the  Government  service 
and  I  recommend  that  by  all  means  his  services  should  be 
retained. 

Mr.  Kane  is  senior  Deputy  Comptroller  and  during  my 
absence  from  the  office,  acts  in  my  stead,  performing  all 
the  duties  appertaining  to  the  Comptroller. 

Mr.  Kane's  knowledge  of  the  National  and  Federal 
reserve  banking  laws  and  the  rules,  regulations,  and  prec- 
edents of  the  office  peculiarly  fit  him  for  the  position  he 
now  holds  and  which  he  has  held  for  many  years,  the 
duties  of  which  he  has  discharged  with  the  highest  dili- 
gence, intelligence  and  fidelity.  He  has  attained  a  pro- 
ficiency in  his  work  which  makes  him  of  exceptional  value 
to  the  Treasury  Department. 

Mr.  Kane's  long  experience  in  the  office  makes  his  service 
peculiarly  valuable  at  the  present  time,  and  if  he  were  to 
retire  from  the  service  at  this  time,  it  is  doubtful  whether 
another  man  of  his  experience  and  ability  in  handling  these 
difficult  problems  could  readily  be  secured.  His  services  are 
such  as  I  should  very  much  regret  to  dispense  with  now. 
While  he  is  a  man  seventy-two  years  of  age,  he  has 
accurate  and  keen  possession  of  all  his  faculties  and  is 
capable  of  rendering  a  greater  amount  of  service  in  the 
position  in  which  he  is  serving  the  Government  than  many 
younger  men.  Therefore  I  request  that  the  time  of  his 
services  be  extended  for  such  period  as  is  permitted  by  law. 
In  my  opinion  the  mental  and  physical  condition  of 
Deputy  Comptroller  Kane  at  this  time  is  excellent,  and 
his  services  would  warrant  the  payment  to  him  by  the  Gov- 
ernment of  a  much  larger  salary  than  he  now  receives. 

It  should  be  understood,  therefore,  that  my  views  as  declared 
in  the  foregoing  paragraphs  are  not  influenced  in  the  slightest 


ROMANCE  AND  TRAGEDY  OF  BANKING  549 

degree  by  selfish  or  personal  reasons,  but  express  ray  honest  con- 
victions, based  upon  long  experience,  of  what  I  believe  to  be  for 
the  best  interests  of  the  public  service  and  of  the  national  banks 
of  the  country  which  I  have  had  the  honor  to  assist  in  supervising 
for  more  than  a  quarter  of  a  century. 

But  it  matters  not  whether  I  am  in  the  Government  service  or 
out  of  the  service,  my  earnest  prayer  shall  ever  be  that  the  Fed- 
eral Reserve  System  may  continue  to  grow  in  strength  and  wisdom 
and  steadily  improve  with  age,  and  that  when  the  history  of  the 
system  is  finally  written  it  shall  be  a  realization  of  the  fondest 
hopes  and  expectations  of  those  who  framed  the  measure,  and  not 
become,  through  faulty,  incompetent  or  oppressive  administra- 
tion, another  "Romance  and  Tragedy  of  Banking". 


UCLA-GSM  Library 

HG  2555  K13r 1922 


L  005  028  091  6 


